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MacroMonitor Market Trends Newsletter February 2019

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Young and Risky!

History repeats itself—it's just difficult to predict when that repeat is going to happen. Since the end of the Great Recession in 2009, the stock market has gone up consistently. Another market downturn is inevitable; the question is when? Mutual fund investors are cautioned that past performance does not necessarily indicate future results. However, because people are creatures of habit, we can gain insight into how investors might react to similar circumstances by evaluating investors' past behavior.

The MacroMonitor has been measuring investors' attitudes and behaviors for the past four decades, during which the US economy has experienced a number of market "corrections." Successfully navigating these market events can be challenging, and investors' responses can not only affect their own financial well-being but that of the overall economy as well. Understanding investors' mind-sets, their tolerance for risk, and their reactions to market events is critical for financial-services companies to help clients manage their investments and prepare for stormy weather.

What impact does market change have on investors' tolerance for risk? Does investor-household risk tolerance (willingness to accept greater loss for the chance of a higher gain) fluctuate with changes in the market? How can financial-services companies take advantage of knowing how investors react to market trauma to protect them from doing what's wrong? To answer these questions, we segment households by age of the primary head and household financial assets. Then we compare the five resulting investor segments by risk tolerance during the past two periods of market volatility: the pre– and post–dot-com market crash of 2000 and the Great Recession of 2008–09.

Percent of High-Risk* Takers Before and After the Dot-Com and Great Recessions

  Pre-Recession Years Post-Recession Years Percentage Point Differences
Age/Assets Group 2000 (Percent) 2008 (Percent) 2018 (Percent) 2002 (Percent) 2010 (Percent) Est. 2020 (Percent) 2000–02 2008–10 2018–20

*Risk Tolerance = 4 or 5 on a five-point scale from very low risk/very low return to very high risk/very high return.

<40/$50K+ 54 45 39 43 29 ? -11 -16 ?
40<50/$100K+ 52 44 37 33 37 ? -18 -7 ?
50<60/$150K+ 47 28 33 28 22 ? -19 -6 ?
60<70/$250K+ 29 16 25 15 16 ? -14 -1 ?
70+/$250K+ 9 12 22 9 12 ? 0 0 ?

The table above shows not only the marked differences in the risk tolerance across the five segments (younger to older) but also a change over time in the degree of risk each cohort has been willing to accept, particularly in reaction to severe market events. Specifically, we see two important emerging developments: A young emerging affluent investor who is highly reactive to market downturns in comparison with older, more experienced affluent investors who "stay the course," and declining risk tolerance among the young emerging affluent segments, with rising risk tolerance among older investors.

For example, younger-investor risk tolerance drops the most after a market correction (54% to 43% in 2000–02 and 45% to 29% in 2008–10) and does not recover as much before the next event (54% to 45% in 2000–08). Older investors' risk tolerance is more stable with less need to recover.

Understanding these changes in investors' mind-sets is critical for financial-services providers to best help their younger and older clients navigate and plan for their short- and long-term goals and maintain calm in the midst of a crisis.

The emerging affluent-investor segment is particularly important to companies that service investors, given their potential for a long-term relationship. The MacroMonitor reports that the youngest investor households—with heads age 40 years and younger and financial assets of $50K or higher represent 14.5 million households or 10.4% of all US households.

The MacroMonitor provides fact-based information to identify, profile, and understand household populations better. For more information, please contact us.

Subscribers have access to this month's Segment Summary: Emerging Investors. Subscribers may request the underlying set of data for this Segment Summary. For more information, contact CFD today.