In “Disappointing Returns“, I discussed how the typical investor lags the market indexes by quite a bit. Another thought recently occurred to me, somewhat related. I suspect that a market return at the beginning of one’s investing life can create an expectation that will impact one’s choices for the rest of their days, creating a different risk tolerance depending on that early experience.
For example, we look at the generation growing up in the 20’s and becoming of age (i.e. starting work, and beginning to have investment choices) right when the great depression started. They saw an annualized ten year return from 1928 to 1937 of .9%, and, given the loss of jobs experienced, likely sold out and saw not even that small return.
Skip ahead to the 80’s. A return of 17.7% annualized, and only one down year in the decade. The crash of 87? Easily forgotten, as the full year was a positive 5.7%. Only those who were trading were really impacted, along with those who chose to retire based on the numbers they saw at the peak. All in all, a good decade to start one’s investing life.
The 90’s were almost a repeat decade, returning 18.3%, again with just one negative year. This combined two decades set up an unrealistic expectation as the long term market average has been just less than 9% for the eight decades prior. A full generation with a mostly positive market experience.
Now, let’s look at the current decade, the return from 2000-2008 was a negative 6% annualized. That’s 6% lost each year not over the whole period. Having enjoyed the two decades prior, dollar cost averaging year after year, even these last 9 years haven’t scared me out of stocks. But I’m thinking that those who have graduated school and joined this current market cycle, one worse than the great depression when judged by stock returns alone, as their introduction to investing are destined to view the market as dangerous and less likely to be stock investors.