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How A Recession Rewires Your Tolerance For Risk

How A Recession Rewires Your Tolerance For Risk

How A Recession Rewires Your Tolerance For Risk : NPR.

UC Berkeley Economics Professor Ulrike Malmendier has been researching how big economic changes, such as a recession or depression, affect the way people invest. She says the past decade — with the tech bubble burst of 2000, the crash of 2008 and the plunge of this month — has made young people less likely to invest in the stock market.

 

What happens in the years following a depression or recession, Malmendier explains, is that the people affected actually think bad events are more likely to happen than they are. So if you give them a 50-50 gamble, they think it is really more like a 90-10 proposition and walk away.

 

“This is drastic because despite all those ups and downs I think most financial economists would agree that a young person who is saving for the long-run should just have a broadly diversified portfolio, and this is not likely to happen at least for the next coming years,” she says. “So the younger generation is really losing out in terms of the long-term preparation for when they have high expenses, family, ultimately retirement even.”

NeilS – Of course, this evidence does not seem conclusive on the investing behavior of the young, but it certainly highlights an important point.  I know many younger individuals that are very risk averse and are unwilling to stomach the volatile swings that the stock market offers these days.  If the “new normal” of the markets is increased volatility, younger people may just have to learn to adapt.

Of course, we live in extraordinarily uncertain times, and the swings that accompany this uncertainty can be downright nauseating.  Nevertheless, time has shown that always assuming the worst and betting against the growth of the U.S. and world economy has been a bad bet.  Hopefully young individuals are not permanently scarred and will be able to reasonably diversify their portfolios for the long-term.

[PollMe form='InvestingFear']

 

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