How A Recession Rewires Your Tolerance For Risk Financial advisers say people in their twenties should invest heavily in equities since they have the greatest tolerance for risk. But since the stock market crash of 2008, young investors are cashing in. It turns out, the stock market volatility of the past decade might affect how they invest for the rest of their lives.
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How A Recession Rewires Your Tolerance For Risk

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How A Recession Rewires Your Tolerance For Risk

How A Recession Rewires Your Tolerance For Risk

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DAVID GREENE, host: The most talked about topic on the campaign trail, of course, has been the economy. After the rough and tumble week on Wall Street, people are getting jittery, and many are flocking to safer investments. If you're young, the standard investment advice would be to hold tight. Turns out, though, that younger people might actually be the ones fleeing fastest from the market.

That's according to Ulrike Malmendier. She's associate professor of economics at the University of California, Berkeley. And she's been researching how big economic changes - say, a recession or depression - affect the way people invest. According to her, all that's happened this past decade - the tech bubble burst of 2000, the crash of '08, the plunge this month - could have an influence on the younger generation and their investment decisions.

ULRIKE MALMANDIER: Your average lifetime experience so far has strong predictive power on your willingness to take risk. So if you're born in a period where things are going badly, stagflation in the '70s or just the current financial crisis, you're very unlikely to be investing at all in the stock market, if so very little.

GREENE: And we'll hear more from the professor in just a moment, but first, we spoke with a few recent college graduates about investing.

NARAYAN CHOWDHURY: My name is Narayan Chowdhury(ph). I am from Cincinnati, Ohio. And I'm 26 years old.

GREENE: After Narayan graduated from Denison University, he got a job as a chemical technician at a Ford plant, and he dabbled in day trading.

CHOWDHURY: I did pretty well that first year. I made about 100% on my portfolio.

GREENE: But the volatility this past month has made him change his strategy.

CHOWDHURY: Putting things in a little bit more stable areas like bonds, metals and things like that.

GREENE: Let's turn to Dan McMahon(ph). He's another recent college grad. He's 25 and lives in Chicago.

DAN MCMAHON: Fortunately, my parents had the foresight to invest some money for me in a fidelity fund and a UBS fund when I was little.

GREENE: Dan found out about those funds just this year. And given all the news, he wants to move a lot of his money to a savings account.

MCMAHON: There has been a question in my mind of, like, well, what do I do next, you know, once this is officially mine?

GREENE: Both Narayan and Dan sound very conservative these days.

CHOWDHURY: The older perspective is that the stock market is there as, you know, a way to gain wealth over the long-term, whereas there's really no way to know these days.

MCMAHON: It's not to say that people in the older generations are unrealistic or something, but the truth is I've grown up during a time where the economy seems to be in constant turmoil. It all seems like a gamble to me. So do I want to gamble? I don't know.

GREENE: These kinds of fears don't surprise Professor Ulrike Malmandier at all. She's studied the generation known as the depression babies, and her research shows these kinds of fears can last.

MALMANDIER: It takes about 30 years to go away, but then it does. So if somebody experienced Great Depression in the '20s, in the '50s, that person will actually not be as distinguishable from somebody who did not experience the Great Depression.

GREENE: She is worried that young people today might invest very little, if at all, in the coming years.

MALMANDIER: That's drastic because despite all these 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 likely not going to happen at least for the next coming years. So the younger generation is really losing out in terms of the, you know, long-term preparation for when they will have high expenses, family, saving for retirement.

GREENE: Now we should say not all young people are shunning the market.

SALLY PARROT: I think this is one of those situations where everyone would just calm down. For the most part, we would be OK.

GREENE: Meet Sally Parrot(ph). She's 31 years old. And after graduating from college and paying off some debt, she and her husband put money in the stock market. They lost a significant amount of their investment during the crash in '08.

PARROT: And it was pretty freaky because we felt like we were doing the responsible thing, but it didn't turn us off from investing in the stock market. The only way for us to have a chance at having a substantial nest egg by the time retirement comes is to take a risk.

GREENE: Just a few of the stories of how these uncertain times are weighing on the minds of younger Americans.

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