Most investors would readily admit that past experiences in the markets tend to influence their decision-making over time. At best, our mistakes can inform us what to avoid in the future. At worst, we allow certain experiences to create unproductive biases in our mindset. A good example of such a bias could be the tendency of Depression-era investors to avoid stocks altogether following that time period, given the scars left behind from such a difficult experience. The problem with such a bias, can be the creation of an even bigger opportunity cost in its wake—the opportunity cost of not participating in the gains that followed.
‘Newer’ investors, for example, millennial investors, don’t really carry around those types of biases or scars. They have not been investing for long enough, and generally do not have as much at stake as retirees do. Marc Andreessen, the founder of Netscape and a prominent Silicon Valley venture capitalist, offered a smart framing for how and why millennials see the investment landscape differently than older investors:
“Investors who were in the stock market in 1929 never went back into the stock market. If you live through one of these scarring crashes, you get psychologically marked. We have an entire generation of Depression Babies – including me – in Silicon Valley who went through the 2000 dotcom crash.
But enough time has passed since the crash that kids are coming to the Valley who don’t have a memory of the crash. They were in like 4th grade when it happened. We get in these weird conversations where we’re telling them cautionary tales of what happened in 1998, and they look at you like you’re a Grandpa.
We have a new generation of people in the Valley who say, “Let’s just go build things. Let’s not be held back by superstition.’ It’s not that one is good or bad. But the balance is shifting.”
Andreessen’s is a fascinating take, and it makes sense. But it also creates some food for thought: if millennials tend not to see the market and growth prospects as dimly and cautiously as older investors do, wouldn’t it follow that they (millennials) could be the future drivers of inflows and risk-taking that makes markets grind higher over time?
There almost feels like there could be an analogy to something like the Social Security system here: younger generations pay-in so older generations receive the benefits. The same principle may very well apply to growth and innovation in the economy and investment in the stock market: millennials invest fresh ideas and capital into the markets, and older generations reap the returns. It’s an abstract theory on behavioral investing, of course, but it’s an interesting thought to consider.
Andreessen’s comments come at a time when mutterings about over-valuations in the technology sector are starting to become more frequent. His quote was essentially his way of saying that even though technology valuations may be on the rise, this does not feel like 1999, when companies like Pets.com were having their share prices bid up even though they had no earnings. Most millennials won’t remember those events, because they were still in school. High school, that is.
It’s All About Behavioral Finance
The point of thinking about the “hows” and “whys” of investing is to dig deeper into the important field of behavioral finance – why we make certain decisions and avoid others, how we can pinpoint our weaknesses and work to strengthen them. As we have said in posts before, investors can be their own worst enemies when it comes to investing. Older investors with haunting experiences, for instance, may be too risk averse at a time when they need growth in their retirement plan. On the flip side, some may take on too much risk when its capital preservation and income they need. The key is to find the right balance, and work through our emotional impulses.
That’s where working with a financial advisor can play a huge role in driving long-term success. An advisor can not only be a sounding board for potential decisions an investor is considering, they can also keep the investor focused on the long-term goal of the investment plan – through good times and bad. Our Wealth Managers serve in that role for our clients – not only in creating the investment plan, but helping see to it that the long-term plan remains in place, and changes as needed.