Risk Tolerances Change With Both Age and the Market


An investor’s willingness to invest in stocks varies with the level of the S&P 500 index and other major indexes. Similarly, in aggregate, older investors tend to be more conservative than younger investors. Neither statement should be a surprise to those of you who have been investing for a long time and/or are familiar with market cycle trends in the investment industry.chart

A recently published study in the Journal of Behavioral Finance looked at the link between age, risk tolerance and the S&P 500. It sought to determine whether older investors exhibited greater risk aversion when the index declined in value than younger investors did. In other words, the study’s authors weren’t trying to confirm whether older investors are less inclined to risk capital in hopes of future gain during declining markets, but whether their risk aversion increases more than comparatively younger investors.

Risk aversion was assessed through a questionnaire given to participants of defined-contribution plans [e.g. 401(k) plans] offered through Morningstar Associates. (More on using questionnaires to assess risk in a moment.) Approximately 29,000 investors were surveyed. The correlation between average monthly risk aversion and the S&P 500 was –0.46 for the 51- to 65-year-old age group versus –0.20 for the 20- to 35-year-old age group. The negative numbers show that investors’ aversion to incurring a loss declined as the S&P 500 went up and increased as the large-cap index declined. The larger negative correlation for older investors indicates a stronger inverse relationship between risk aversion and the stock market’s performance.

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AAII Model Portfolio Update

Hardinge Inc. (HDNG) was removed from the Model Shadow Stock Portfolio after agreeing to be acquired by an affiliate of Privet Fund Management LLC. Privet will acquire all shares of Hardinge stock it does not currently own for $18.50 in cash. To replace Hardinge, Container Store Group Inc. (TCS) was added.

At the end of February, 11 current Shadow Stock holdings qualified for purchase. Those stocks are Aceto Corporation (ACET), Amira Nature Foods Ltd. (ANFI), AutoWeb Inc. (AUTO), Delta Apparel Inc. (DLA), Hallador Energy Co. (HNRG), Olympic Steel Inc. (ZEUS), Rocky Brands Inc. (RCKY), Seneca Foods Corp. (SENEA), SigmaTron International (SGMA), Strattec Security Corp. (STRT) and Townsquare Media Inc. (TSQ).

Last month, the Model Shadow Stock Portfolio, which is a real-money portfolio of micro-cap value stocks, fell 6.6% in February. The Vanguard Small Cap Index fund (NAESX) fell 4.1% for the month, and the DFA U.S. Micro Cap fund (DFSCX) lost 4.3% in January. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 15.4% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.5% per year and the Vanguard Small Cap Index fund’s (NAESX) average annual gain of 10.2%.

More on AAII.com

Highlights from this month’s AAII Journal

  • The Cost of Panicking – Getting out of the market due to fear over falling prices has a lasting, negative impact on your wealth.
  • A Simple Way to Fund Retirement – Delaying when Social Security benefits are claimed and using required minimum withdrawals to provide any additional income should work well for most middle-income retirees.

AAII Sentiment Survey

Pessimism plunged to its second-lowest level of the year, while neutral sentiment stayed above 40% on consecutive weeks for the first time since last summer. More about this week’s results.

 This week’s results:
  • Bullish: 36.8%, up 10.4 points
  • Neutral: 41.8%, down 3.4 points
  • Bearish: 21.3%, down 7.1 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.

What’s Trending on AAII

The Week Ahead

This Saturday is St. Patrick’s Day; wear something green.

Just as fourth-quarter earnings season has ended, we’ll start to gxet a look at first-quarter results. Dow Jones industrial average component Nike Inc. (NKE), which will report on Thursday, will be joined by 10 other members of the S&P 500. Included in this group are Oracle Corp. (ORCL) on Monday; FedEx Corp. (FDX) on Tuesday; and Accenture PLC (ACN) and Micron Technology Inc. (MU) on Thursday.

The Federal Open Market Committee will hold a two-day meeting starting on Tuesday. A quarter-point rate hike is widely expected to be announced when the meeting statement is released on Wednesday at approximately 2 p.m. Eastern Time. Updated committee member forecasts will be released at the same time. Jerome (“Jay”) Powell will hold his first press conference as Federal Reserve chair at 2:30 p.m.

Elsewhere on the economic calendar, February existing home sales will be released on Wednesday. Thursday will feature the March flash composite Purchasing Managers’ Index (PMI). February durable goods orders and February new home sales will be released on Friday.

Two Federal Reserve officials will make public appearances: Atlanta president Raphael Bostic on Monday and Friday, and Minneapolis president Neel Kashkari on Friday.

The Treasury Department will auction $11 billion of 10-year inflation-indexed securities (TIPS) on Thursday.

Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

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