This may be the most “conservative” generation – that is, the millennials – since the Great Depression, according to Sabrina Bailey, Northern Trust Investments’ head of retirement solutions. And the repercussions could be profound.
Chicago-based Bailey said in an interview prior to addressing last week’s CMSF conference that behavioural factors impacting people’s investment choices tended to lead to sub-optimal outcomes. This notion, of course, is not new. However, she said that young investors today were the first generation since the Great Depression to be as conservative in their investment choices as they were.
She said that the investor population had bifurcated, with 35s and under behaving very differently to 55s and older in terms of the risks they were prepared to take. Ordinarily, the younger one is the more risk he or she is prepared to take. Perhaps, post the GFC, that is no longer the case.
The Depression survivors had good reason to be scarred. Children from the 1930s still tell stories about those days. In Australia, for instance, the NSW Government under Labor Premier Jack Lang, repudiated the UK Government loans and drew the wrath of our conservative Federal Government at the time. Lang widened the nascent social security net, although people living on farms were ineligible because they could “live off the land”. “Depression kids”, became the most conservative generation in living memory.
Whether or not the GFC has had a similar impact is a moot point. And it probably isn’t that important given the changes to society in the past 80 years. What is important though, is that behavioural reactions to investment shifts still cost people money.
Northern Trust is one of the world’s largest investors using factor strategies, which gives it access to a lot of data about investor behaviour in lifestyle portfolios. Bailey’s CMSF presentation showed that recent evidence from the US indicated net transfers out of growth assets started to accelerate in January this year.
While equity exposure should decline, in most circumstances, as investors get older, factor-based investing, for instance, accessing low-volatility strategies, can allow the maintenance of a higher equity exposure. Northern, along with similar managers, will usually recommend a blend of factors, though, because of their cyclical behaviour.
There are lots of behavioural biases that are well documented. An unusual one, highlighted by Northern in a recent paper, has to do with “crossing the “$10,000 hurdle”. Apparently, after making the decision to invest, people want to cross the $10,000 balance mark as soon as possible.
The study involves investors in US employer-sponsored schemes. Once crossing the $10,000 threshold, employees were much more likely to stay with their plan – slashing the drop-out rate by half compared with sown at the $1,000 level.
Bailey, a co-author of the study, says that “mentally, the $10,000 mark triggers a stronger sense of accomplishment and thus incentivizes commitment”.
Of course, a compulsory savings scheme such as Australia’s super guarantee, is a completely different environment. However, bailey told the CMSF conference that more than half of Australian adults invested outside the super system. Plus, of retirees, about 50 per cent goth the full age pension, 25 per cent a partial pension and 25 per cent no pension. The proportion of retirees who get some sort of old age pension in Australia is 75 per cent, compared with only 25 per cent in the average of other OECD countries. Australians also tended to access a pension earlier in life than in other countries.
Greg Bright is publisher of Investor Strategy News (Australia)