🕰️ Generational biases in investing
Hi everyone,
It’s John this week with a relatively short piece spurred by a text I received from an old friend asking for my opinion on some risky leveraged investment products. It got me thinking about investor behavior, return chasing, and decision-making in general.
It seems that most decisions, especially when it comes to money and investing, aren’t really decisions at all. So much of what we do–what we buy, how we save, even how we invest–runs on autopilot, and is powered by habit or instinct. When we do make financial decisions, they’re often shortcuts: heuristics shaped by the stories we tell ourselves about risk, reward, what feels “safe” and–perhaps surprisingly–the economic realities of when we grew up. But how often do we stop to question those stories, or examine the data behind our choices? The truth is, understanding these influences–where they come from and how they shape our decisions–can mean the difference between building a strategy that works for you and one that unknowingly holds you back.
👨👩👧👦 How early experiences shape risk tolerance
Personally, my first foray into investing wasn’t exactly a success. As a teenager, I bought my first stock during the tech bubble, only to watch with naive incredulity as its value tanked when the bubble inevitably burst. Not long after, I entered the professional workforce–degree in hand, brimming with optimism–only to step directly into the chaos of the great financial crisis. Unsurprisingly, left to my own devices, my asset allocation would skew overly conservative–an instinct I’ve had to actively resist to invest more aggressively
When it comes to investing, asset allocation is one of the most important drivers of returns1, and it’s usually a reflection of our own appetite for risk. But risk tolerance isn’t as rational or self-determined as we’d like to believe. Research suggests that the market conditions we lived through early on have an outsized impact on how we view investing for the rest of our lives. People who came of age during a bull market often stick with stocks, believing risks always pays off, while those burned by an early market downturn tend to favor caution, even when it's to their detriment. The household you grew up in matters too. A child of financial instability–where money was a constant source of anxiety–might be wired to avoid risk altogether. On the other hand, someone who never had to think about family finances might take risks without fully understanding them. Both extremes can lead to trouble: too conservative, and the magic of compounding can’t do its job; too aggressive, and you risk unraveling your strategy when markets dip. Striking the right balance of return and safety is critical.
🎰 The rise of the “degenerate economy”
One theme I’ve observed in recent years is an unrelenting appetite for risk. The number of ways to gamble your money today is staggering. Some call it the “degenerate economy”. In recent years, platforms, assets, and derivatives have proliferated, allowing people to bet on almost anything. Marketing often frames this as leveling the playing field, but in reality, it often exploits inexperienced investors, luring them into high-stakes decisions with little grasp of the risks. What fascinates me most isn’t just the proliferation of these tools—it’s who’s using them and why. The demographics are clear: it skews toward young men2. The motivations, though complex and multifaceted, are in my opinion, shaped by one clear factor: 15 years of an unusually positive investing environment—higher-than-average returns, lower-than-average volatility, and brief, shallow drawdowns3. These conditions have fostered a mindset where risk-taking feels less like a gamble and more like a guarantee.
⚙️ Balancing confidence with caution
For any professional under 40 with US stock exposure, the investing experience over the past 15 years has been nothing short of extraordinary. Returns have been above average, volatility below average, and drawdowns shorter in duration. From October 2009 to October 2024, an investor in the S&P 500 enjoyed annualized returns of 14.2%. Those heavily weighted in the tech sector fared even better. The Nasdaq 100 returned 16.8% annualized over the same period4. Broadly speaking, risk assets have performed phenomenally well over the past 15 years. The last time the past 15 years looked this good was the year 2000. Today’s environment feels like a perfect storm: exceptionally strong returns across asset classes, technology that simplifies risk-taking, and deregulation enabling new risk products, hence, the “degenerate economy”. I don’t know if or when an event will occur to swing the pendulum, but research shows that early exposure to high returns can distort perceptions of risk and reward, often leading to overconfidence and aggressive investing. If this sounds familiar, consider what steps you can take to recalibrate your approach. For many, an objective third party can provide valuable perspective, helping navigate decisions often clouded by emotions or unconscious biases.
🌱 A thoughtful approach to investing
In my role at Secfi Wealth, I talk to people of all ages and from all walks of life, each carrying unique stories and experiences that shape their approach to investing. It takes time to truly understand the driving forces behind financial decisions. Building a tailored portfolio isn’t just about the numbers; it’s about honoring an individual’s limits while challenging assumptions that might hold them back. The key is balance: don’t fully trust your instincts, but don’t dismiss them either. A thoughtful strategy respects both your risk tolerance and the realities of the market. It’s about finding that equilibrium where your portfolio reflects not just who you are, but where you want to go.
Things we’re digging:
- 📈 The quants are coming for private equity
- 🥊 Streaming continues to dominate, now in live sports too
- 🍌 It’s a banana, what could it cost? $6.2 million.
1 Vanguard. (n.d.). Why asset allocation is crucial for client success. https://www.vanguard.co.uk/professional/insights-education/insights/why-asset-allocation-is-crucial-for-client-success
2 Bloomberg. (2024, June 28). Retail traders are getting bigger than ever in US stock options. https://www.bloomberg.com/news/articles/2024-06-28/retail-traders-are-getting-bigger-than-ever-in-us-stock-options
3 YCharts
4 YCharts. 15-year periods analyzed on a rolling 12-month basis.