Look at the contradictions, which possibly highlight the differences in demographics, and investors’ mindset. The risk tolerances of the elderly in the US have gone up. “Americans aged 70 and over now own 39 per cent of all stocks and mutual funds (which mostly invest in equities), almost twice as much as was common from 1989 to 2009,” reveals an article in a global magazine. This trend is not fully explained by the fact that the number of elderly is up from nine per cent in 2010 to 12 per cent today. If one accounted for this factor only, the elderly’s share of stock market wealth would have risen by half of what happened since the financial crisis of 2007-09.
The opposite is happening in India. Recent data, and reports from the Association of Mutual Funds in India indicate that most of the retail investors are aged between 18 and 30 years. A study, which looked at 6,00,000 investors found that nearly half were in this age bracket. More importantly, four-fifths of Gen-Z investors in mutual funds hail from beyond-the-top-30 cities, or from the smaller towns. Women, especially younger ones, are increasingly joining the equity gang. This along the expected lines as the younger people are more prone to take on risks, compared to the elderly, and invest in risky equities. The former can afford to make a few mistakes, lose money, and yet have enough years to make up for the short-term decrease in wealth.
What is surprising is that similar factors may be influencing both the contrary trends in the US, and India. One of them is clearly the FOMO factor. When the young see others around them making money, they do not wish to be left behind. They have the desire, ambition, and aspiration to increase wealth, and they tend to dive into the equity seas. Normally, the older generation is risk-averse, but this is not true in the US today. Financial planners in the US provide anecdotal evidence. In one case, clients in their 70s allocated 60 per cent of their portfolios in stocks. In another, an elderly person in a hospice, who had a net worth of $2 million, was busy buying the red-hot Nvidia stock to benefit from tech valuations.
A conservative belief among experts stated that exposures to stocks in portfolios should be 100 per cent minus the age. While a 25-year-old can invest up to 75 per cent in equities, the percentage for a 75-year-old needs to be 25 per cent. These numbers have gone for a six in America, although the adage may hold good in India. In the West, recent studies show that it may be profitable to increase equity allocation after retirement. Holding 30 per cent in stocks, and increasing it to 80 per cent post-retirement may provide higher gains than doing the opposite, as expected due to traditional beliefs. Indeed, this is true in the recent, especially as equities have boomed, and bonds have behaved indifferently, even abysmally.
From 1980 to 2005, the yields on 10-year US treasuries averaged 3.8 percent a year, above inflation. In the subsequent period, the figure dropped below 0.5 per cent. Those who were invested in bonds were further hurt as inflation went up during the pandemic. A double-whammy hurt the elderly. Returns were low, and expenses were up. This was followed by an unexpected and unprecedented boom in stocks, not just in the US but across the world. It suddenly made more sense to shift portfolios, and increase the exposure to stocks. This is exactly what most investors did. But for the elderly, the situation was more desperate. They needed to make up for the losses. Moreover, Covid reminded them that equities tend to zoom after each financial crisis, as was the case in the 1980s, and post-2009.
In India too, interest rates, and bond yields have reduced. The favoured choice of fixed deposits is no longer a preferred one as inflation continues to be high, and has only reduced to extremely low levels in the recent past. Hence, there is always an urge to increase returns. While the elderly still have options that provide them with higher-than-fixed-deposits rates, this is not true for the younger cohort. They seek refuge in stocks. For them, it is now easier to do so because of the rise of the mutual funds, as well as coordinated and serious efforts to promote it as ideal investment. It is not surprising that mutual funds today are flush with funds, and the younger generation has become disciplined enough to invest via SIPs.
Since the youth is more tech-savvy, the rise in the digital economy, with more and easier choices to invest in shares, or mutual funds through apps, and online platforms helps their entry into stocks. In addition, most of those under 30 have not witnessed a downturn, or recession, or have little memories of it. The last was during the pandemic but the stock markets across the globe recovered so fast that people remember the deaths, inflation, emergency expenses, and so on, but not the wealth erosion. In fact, thanks to governments’ largesse, the economy was flush with money, and stocks began to go up within weeks and months. The pandemic aided the stock boom. The loans that businesses got at low interest from the Government were logically, and comfortably pumped into equities.
In contrast, the older generation remembers the past recessions, and inflationary times. They are averse to risk their money, even if the potential returns are higher. A recent survey found that Indians would earn lower returns rather than risk their capital. Thus, the elderly are still fine with fixed-return instruments, especially since some of them give decent profits. Memories, however, work differently in India and the US. They nudge Indians to be more conservative, and safe. They pressure Americans to take risks, especially if the aim is to leave the wealth in the form of stocks for their children, and grandchildren. It is a matter of perspective. Stocks will bounce back at some point in time in the future, feel the Americans. What if they do after I die, think the Indians.
For both these sets of people, the effect of a future downturn may prove precarious. In the US, the stock-heavy elderly may be hit by a reverse FOMO, or losing heavily. This may force them to sell, which will contribute to the market slump. In India, a bearish phase may put the youngsters’ dreams and aspirations in disarray. The hurt will be so deep that they will stay away from equities for a long time. This is disastrous in a still-growing economy that needs new investors.