Generations: Key Drivers of Investment Behavior

Download PDF

By Randy Myers

Having witnessed two major bear markets in a single decade, some young investors appear to be steering clear of stocks. This could have an impact on their long-term financial security, as stocks historically have provided higher returns than other asset classes over long periods of time.

Addressing participants at the 2011 SVIA Fall Forum, Dean Hamilton, an investment analyst with mutual fund company, The Vanguard Group, said data compiled by the Investment Company Institute shows that among U.S. households headed by someone born between 1970 and 1979, less than 40 percent own stocks either directly or through mutual funds, exchange-traded funds, or variable annuities. By contrast, more than 52 percent of households in the 1960-to-1969 birth cohort own stocks directly or indirectly, as do nearly 55 percent of those in the 1950-to-1959 birth cohort. Even those born in the 1930s and 1940s are more likely to own stocks than those born in the 1970s, the data indicate.

ICI’s research also found that among so-called “Generation Y” investors—those born between 1977 and 2001—only 25 percent identify themselves willing to take above-average risks for above-average gains. That compares with 33 percent of Generation Xers born between 1965 and 1976.

Intrigued by the ICI’s findings, Hamilton said, Vanguard compared them with the behaviors of investors in the defined contribution plans for which Vanguard serves as recordkeeper. Among that group, it found, the average allocation to equities has actually risen for investors under the age of 30. The trend strengthened after enactment of the Pension Protection Act of 2006, which among other things allowed employers to enroll workers in defined contribution plans automatically. The Act also designated target-date funds as qualified default investment options in retirement savings plans, which likely boosted allocations to equities. Target-date funds seek to provide an asset allocation mix appropriate for an investor’s age, and typically include a material allocation to stocks.

As target-date funds continue to grow in popularity, Hamilton suggested, allocations to equities by young investors should continue to grow. Vanguard’s data indicate that where those funds are included in the investment lineup, allocations to equities by investors age 35 and younger are nearly 24 percentage points higher than in plans without those funds.

Vanguard’s data suggest there is no “lost generation” of equity investors among the young, Hamilton concludes, at least in the retirement plan market. He attributed this finding to the growing popularity of auto-enrollment and target-date funds. To ensure brighter outcomes for retirement plan investors, though, he said plan sponsors may have to add still more features to their plans going forward, including auto-escalation of participant contributions and personalized investment advice for older plan participants who want to be more engaged in their retirement planning.