Young investors have only seen bulls
Meet the generation of investors who haven’t known a bear market.
The U.S. stock market has been on the upswing for nine and a half years, during which a cohort of younger investors has never dealt with a 20 percent drop in the S&P 500 – the classic definition of a bear market. Such a decline has historically happened every four or five years.
That’s nice for these 20- and 30-somethings, and their retirement accounts, but it raises the question: What will they do when the next downturn inevitably arrives? How they respond will be crucial because this generation bears a heavier responsibility for paying for their own retirement, as pensions go extinct and Social Security’s finances weaken.
Few analysts are predicting an imminent downturn for the S&P 500, which finished Tuesday within 0.8 percent of its record, but they’re much less confident about 2019 or beyond due to rising interest rates and other market challenges. The fear is that inexperienced investors will panic at their first taste of a bear market and sell their stocks, which would lock in their losses.
For young investors with decades to go before retirement, conventional wisdom says the best bet is to ride through and wait for a recovery. The average bear market brings a loss of nearly 40 percent for the S&P 500, but it typically lasts less than two years, according to S&P Dow Jones Indices.
Many experts say today’s young investors are generally taking the right approach. For instance, many are invested in the stock market through specialized kinds of mutual funds in their 401(k) accounts called target-date retirement funds, which may keep them from making rash moves.
Some younger investors also say the experience of their parents in the wrenching financial crisis of 2008-2009, when the S&P 500 lost more than half its value, has prepared them for the next downturn.