Growing Conservatism Among Investors Towards Stocks

by: Larry MacDonald

Conservatism toward stocks is becoming more pervasive, according to surveys conducted by MFS Investment Management. The Boston-based money manager reported in early January that the percentage of investors who say they “will never feel comfortable investing in stocks” has jumped from 26% to 29%.

Interestingly, much of the aversion was concentrated in Generation Y (ages 18-30) respondents. In fact, a whopping 52% are currently turned off stocks, notes Chris Taylor in a Reuter’s article.

This heightened aversion within the Gen Y group isn’t surprising. They came of investing age during the 2000s and witnessed a great deal of volatility that resulted in flat to negative returns by the end of the decade. They may have also seen their parents suffer through the crashes of 2002 and 2008, perhaps even taking big losses from which they have yet to recover.

However, I suspect the current skepticism will evaporate after the next bull market gets rolling. Sentiment always follows the market, if history is any guide. That’s unfortunate because many investors will miss out on the best of the gains.

Too bad the focus is not on the historical record. As the past two centuries have shown, there has never been a 15-year period in which stocks delivered losses. That means when an investor buys in a given year, they can be reasonably certain of earning positive returns on their investment within 15 years—with gains ranging from just above zero to over 100%. Averaging the returns over the long run works out to 7% to 9% per year.

Investments made during the bullish phases are more likely to have long-term results closer to the zero bound. Conversely, investments made during the bearish phase are more likely to end up closer to the 100% level.

Not to be overlooked is the compounding of returns. Someone investing a portion of their income each year has a good chance of finding that, after 15 to 20 years, the return on their portfolio rather than salary deductions, is making a greater contribution to their retirement fund.