John Diehl | Tue Nov 28 09:30:00 EST 2017
Ten years ago, the U.S. housing market collapsed, which triggered the start of what is known as the Great Recession. Now that a decade has passed, Hartford Funds conducted a survey to find out how Americans were impacted and whether they changed their financial behaviors as a result. Three key points emerged from this survey that financial advisors may find to be particularly useful.
1. Investors Have Selective Memories
Forty percent of survey respondents said that the financial crisis had no impact on their life, yet 42 percent reported that they avoid the market, and 46 percent said they have altered their spending and savings habits.
In my observation, the hangover from the market party from 2002-2008 was actually longer than most. But now that we’ve been in recovery for the past several years, Americans are beginning to forget just how challenging the 2008-2011 time period really was. They say it had no impact, yet large numbers still don’t trust the market, have made spending changes, and say they had trouble making ends meet.
These results signify that advisors should continue to remind clients that markets can get turbulent, so they should steer clear of emotional investments and knee-jerk reactions by maintaining a fundamentally diversified portfolio to help them achieve their long-term financial goals. Additionally, advisors can use these results as another value-add reason for investors to work with advisors, who can provide the full birds-eye view insight when investors can be short-sighted.
2. Investors Are Complacent
When asked how/if they are preparing for the next recession or market downturn, 43 percent of respondents said they are taking a wait-and-see approach to the markets.
Investors who say that they’re taking a wait-and-see approach may feel that things have been so good that they don’t need to review where their investments stand. The problem is, complacency can also mean overconfidence. Index investing has been good because all of the indexes have been up since March 2009. Rising tides float all boats, but what happens when the tide goes out?
Inertia is a powerful force, and it presents an opportunity to educate investors who may be at a standstill about the benefits of perspective and direction from a financial advisor. Investors should be intentional about what they own and why, and they may just need a nudge from advisors to help them remember that and avoid hitting a plateau.
3. Millennials Don’t Trust the Market
Forty-eight percent of Millennial respondents said that they avoid the market altogether, and 24 percent have already shifted their retirement timeline and plan to work longer than originally anticipated.
The MIT AgeLab has done research around the Age Cohort Theory, which essentially postulates that much of our worldview is shaped by events that occur when we are between the ages of 17-22. For Millennials, this was the Great Recession. The fact that Millennials are the least trusting falls in line with this theory, since the financial crisis happened during their formative job-seeking years.
Advisors will want to keep this correlation in mind when working with the younger (and “next generation”) of investors, so that they can tailor their guidance to be empathetic to Millennials’ general set of concerns. It’s also helpful to remember that the generations can be cyclical. Our Depression-era parents and grandparents spent cautiously, but the Boomers became profligate spenders, and now the Millennials are trending conservative. I believe the cycles will continue, just as economic cycles continue through time.
The Great Recession continues to affect investors, whether they realize it or not. But the good news is, no matter how much time has passed, advisors can use the crisis to help their investors improve and protect their portfolios, as the subsequent lessons we all learned are timeless.
All investments are subject to risk, including the possible loss of principal.
Diversification does not ensure a profit or protect against a loss in a declining market.
MIT AgeLab is not an affiliate or subsidiary of Hartford Funds.