"You did what you were supposed to do. College. Graduate school, maybe. Bought a home. Invested in mutual funds.
And now? You have student loan debt. Your degree has not shielded you from unemployment (or the fear of it). The house is worth 20 percent less than two years ago, and your retirement portfolio is down 40 percent from its peak."
As a result, will investors invest less in the stock market? Buy fewer (and smaller?) homes? Demand a larger risk premium? Take on less debt? Save more (and thus spend less)?
The answer to all of these seems to be yes. What that means over a longer term horizon is much less clear.
The NY Times's Ron Leiber gives us a look at changing risk aversion levels with a very well timed disclaimer:
"I’m not sure we can say for sure whether there has been some permanent change in attitudes toward risk. It’s easy to overestimate the extent to which the world — and our perception of it — has changed in the middle of a crisis. But this one has not lasted long. And its duration does not come close to matching the period in the 1930s that left a permanent imprint on so many people’s financial habits."
One other look-in on the risk of turning away from equities:
" The problem with their approach, according to Mr. Brosious, is that by investing conservatively they are probably guaranteeing themselves a smaller return and a more meager standard of living in retirement.Oh course this can be changed by saving more, but that means spending less, which means slower recovery.
BTW sort of thrown into the article is a nice (short) recap of the book “Are You a Stock or a Bond?,”
“The idea is that we should focus on our human capital and invest in places where our human capital is not,” [the book's author] Mr. Milevsky said. “It’s not about risk tolerance or time horizon but about what you do for a living.”As a tenured professor, he invests entirely in equities. Other people with bondlike characteristics who are far from retirement could take similar risks, and withstand 2008-level losses, because their incomes are fairly stable. Those who have more stocklike careers, however, probably ought to invest a bit more conservatively, in both their retirement accounts and in their primary residences.
BTW #2: this article is also discussed as part of the NY Times Podcast (12 minutes) that also talks about what the stimulus plan may mean for individuals. However I can not link to it. It is on the left side of the article.