How market experience colours risk appetite

A study of different investor generations suggests that bear market events could influence risk-taking behaviour

How market experience colours risk appetite

Based on traditional financial wisdom, an investor should gradually transition from an equity-heavy portfolio to one that’s tilted more toward income. The thinking behind it is that as they get older, their appetite for investment risk will decline as they come to rely more on passive income.

But according to Vanguard, it might not be that simple. Recently, it conducted a survey of 4 million US-based retail investor households with a combination of retirement accounts and taxable brokerage or mutual-fund accounts. Their aim: to assess household risk-taking across generations.

Millennial households — those born after 1980 — generally had around 90% equity exposure in their portfolios. But around a quarter of that group broke the mold by adopting conservative portfolios. The working theory is that those households were strongly influenced by bear-market experience from the dot-com crash and 2008 global financial crisis

Dividing millennials based on whether they started investing with Vanguard before or after the 2008-2009 financial crisis reinforces that notion. Both groups have median equity allocations of around 90%, but:

  • 22% of those who started investing post-crisis had zero-equity portfolios, compared to only 10% of those who did so pre-crisis;
  • 14% of post-crisis first-time investors had all-equity portfolios, compared to 33% of the pre-crisis group

“Memories of the financial crisis may make many millennials more reluctant to take on market risk due to heightened fears of market losses,” the report said. But while there may be concerns of millennial investors being too conservative, most of the retail households that Vanguard examined from that age group were taking on significant levels of equity risk.

Looking at older generations, Vanguard also found a less substantial gap in equity exposure among baby-boomer and silent-generation investors compared to millennials than expected. Boomer retail households were 68% exposed to equities, while the silent generation typically has 62%.

“[M]any current retirees hold traditional pensions, allowing, all other things equal, for more equity risk-taking,”the report said. Healthcare cost concerns, low bond yields, experience with bull markets from the 1980s and 1990s, and a desire to fund bequests for heirs could also be driving risk appetite for older investors.

Read more: How passive income can help you build your wealth

There were also generational differences in account balances among generations, reflecting where they are in the investing life cycle. Nearly half of millennial households opened their first Vanguard accounts in the last three years; their median household balance is just 21% of the overall median household balance. On the other hand, silent-generation households have had their accounts for at least 15 years, with median balances more than three times that of the overall sample Vanguard analyzed.

“Whether younger investors will, in the future, hold similar levels of equities as today’s older investors will depend not only on stock market experience but also on the changing nature of retirement savings,” the report concluded.


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