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Tuesday, September 27, 2011

Gen-Yers Uncomfortable With Market

Source: Richard Scarry
The September 12 - September 18, 2011 issue of Bloomberg Businessweek reports ("Armageddon" "We're Dealing With a Culture of Hypochondria" by Robert Farzad) that, according to an MFS Investment Mangement survey, 40 % of Gen-Yers (ages 18-30) agree with the statement, "I will never feel comfortable investing in the stock market."

The article goes on to say that this is "understandable"  because funds are underperforming today.  JPMorgan Chase found that 47% of 2,808 funds they track trailed their benchmark by more than 2.5% this year.

This underperformance is not news to the readers of this blog.  I, along with many other bloggers, constantly preach the folly of investing in actively managed funds and constantly report on their underperformance, after all fees and costs, over the long run.  Depending on the time period studied, 75% to 90% of actively managed funds underperform over the long run.  Furthermore, it is impossible to pick the superior performers.

Source: Bloomberg Businessweek 9/12 - 9/18, p, 47
Some specific year-to-date fund returns reported by Farzad are shown in the table.  Over the same period, through September 5 the S&P 500 was down 6%.

The American Funds fund is the largest fund in the country.  The Fairholme Fund is managed by Bruce Berkowitz, who was named "domestic stock fund manager of the decade" in January 2010 by Morningstar.  By contrast to these stalwart funds, the index is the equivalent of "the lowly worm" in the picture books by Richard Scarry my kids enjoyed as infants.

The full picture can be seen in the graphic:
Source: Bloomberg Businessweek 9/12 - 9/18, p, 47

 CLICK IMAGE TO ENLARGE  The negative view of markets by so many young people is disheartening on 2 counts.  First, one of the main tenets of attaining a decent retirement is to start investing early.  In the "haven't we seen this movie before" category, you can bet if the Dow rose 2,000 points over the next 12 months the very same Gen-Yers would be jumping in.

Secondly, in the view of many long time observers of the market, young people shouldn't even be considering high-priced active funds.  Minimize cost and index the market.  Hold on for the long term.  Embrace falling prices.  You are interested in where prices will be 30 years from now!

Long Term Market Outlook

Gen-Yers face the same hurdle as most investors:  they have a hard time seeing ahead.  Like many, they look in the rear view mirror.  Like many, they focus on the problems.  Suffice it to say that, over the past 30 years, there have just about always been very good reasons not to invest, including the S&L crisis, corporate governance problems, the East Asian crisis, the need to bail out the largest hedge fund in the country, the crash, 9/11, etc., etc.

But go back to 8/6/1991.  This was when Tim Berners-Lee created the first web site.  First cell phone?  In 1994, the first cell phone weighed 2 pounds and cost almost $4,000.  My first calculator was a Bowmar Brain that cost $110 and was equivalent to what you can get today for $12.  And so it goes with flat screen tvs, medical technologies, online courses in education, online banking, and on and on.  These are the things that make the world completely different from 30 years ago and are made by companies who prosper.

These were the changes we couldn't see.  These were the changes that drove stock prices sharply higher.


  1. I remember many of my coworkers panicking in the crash of 1987 and pulling all of their money out of the market for many years. They lost of lot of appreciation that they will never recover from. Anyone with a 20, 30 or 40 year investment horizon should pray for the markets to go down today so they can reap the benefits of the inevitable recovery.

  2. Yes, I remember the '87 crash as well. I should have mentioned it. Good point.

  3. Recently, I've been showing a 10 year Morningstar chart of Vanguard's balanced fund. Ten years ago, the markets weren't at their 2000 peak, but not far off. As of today, that fund has gained +70% in a decade. It's not the kind of returns people had from 82-2000, but when a solid, diversified portfolio (or balanced index fund, in this case) reinvests dividends over time, it can reap a surprising return, even during a "lost decade"

    The fun question to ask is this: "Did you make 70% during the past decade? And if not, why not?"

    High fees and silly market timing moves tend to be the culprits.

  4. I remember during the dotcom boom, there were funds exclusively trading high-flying tech and dotcom companies with spectacular returns... for a while!

    I was lucky enough to see the boom and the bust - gives some perspective on how crazy the markets can get!

  5. re: Andrew (aka as "The Millionaire Teacher") I often wonder why it is so often referred to as the "lost decade" as if bonds didn't exist and have really great returns.
    Hopefully your book and message gets to enough Gen' Yers to meaningfully change their views.
    re: MC Experience is the best teacher. Reading the history is one thing, living through it another.

  6. re: Lori Even Lowly Worm knows that indexing is the way to go!

  7. This is great advice. I do see a positive in the caution: we're not as apt to make risky investments. In the end, that's the key word/phrase: "risk" or "risk tolerance." It's not as effectively taught as it is discovered through experience. I can hear that it is important to invest, but let me see my purchasing power erode due to taxes and inflation. Similarly, let me see enough people retire without dignity, and I will have a newfound motivation to invest. One thing my generation lacks is the proper context to interpret the recent economic events.

  8. re: Shawn Great points. I would add that one thing that might be helping is the incessant negative publicity on Social Security. If we were in 1999 again, with stocks gaping up, young people would be piling in. Its the ol' buy high sell low action.