This article by William Cowie was originally found at http://www.getrichslowly.org/blog/2014/12/04/what-is-your-investment-strategy/
Get Rich Slowly conducted an online survey of about 2,000 randomly selected individuals on the subject of investing recently, and I found the insights from the results quite interesting. Some of the highlights of the findings of the survey are:
1. Over 40 percent of all respondents do not invest at all at the present moment.
2. Despite investing being more advantageous to the young, the highest proportion of respondents not investing were also the youngest.
3. Using index funds is not a primary investing strategy by any age group.
4. The older people get, the more active they become in their investments.
The first question on the survey was: What best describes your investment strategy? Six possible answers were provided for respondents to choose from:
- I create parameters for my adviser based on my own research.
- I don’t invest right now.
- I let others invest for me.
- I pick index funds to get an average return.
- I review my allocations quarterly.
- My investments require active supervision.
By a large margin, most respondents selected option number two, i.e., “I don’t invest right now.”
This result is in line with numerous reports which have documented in many ways how Americans are under-investing for their retirement, some even stating that up to 60 percent of Americans don’t have either mutual funds or exchange-traded funds (ETFs).
The general lack of investing activity could turn out to be a time bomb when those folks want to but find they are unable to retire. It would be bad enough if, say, two out of every ten people were unable to support themselves as they grow older, but the results of this survey suggest the magnitude of the problem could be much greater than that, with almost half the respondents reporting that they are not investing at all.
No index funds?
Another surprising result is that index funds, regarded by many as the safest and most profitable long-term investment strategy, is not the most-followed investment strategy. It is not even the second-most popular. This is true across all age groups. Only 20 percent of those respondents who actually do invest use index funds as their primary investment strategy.
The most popular strategy, in contrast, was “I let others invest for me.” Given overall investing industry data, that shouldn’t be surprising: The Investment Company Institute reports that about 80 percent of assets invested in mutual funds are invested in managed funds, not index funds.
Why aren’t index funds used by more people? The reasons were not probed by the survey, but a possible explanation is that individuals who do invest do so through their employers’ 401(k) and similar retirement plans. Those plans tend to be managed by outside investment firms who encourage participants to invest in the stock market through their captive managed mutual funds by various means, but most 401(k) plans don’t even offer index funds as an option, or, when they do, they give those funds no prominence because the fees those plans generate are far lower than the fees they get from their managed funds.
Investing strategy by age
The survey didn’t explicitly ask each respondent to state their age, but it is possible to guess their approximate age from their response to this question: How many recessions have you survived? The number of recessions survived can be considered a proxy for age because nothing influences the answer other than age.
In the chart below, the survey’s responses reveal how the investment strategies of respondents correlate with their ages:
The first, and most glaring, conclusion from the long red bar in the chart above is that the youngest among the respondents overwhelmingly do not invest. Given that the last recession has been officially over for not much more than five years, that would place the group who haven’t survived a single recession yet in their mid-twenties or younger.
It is easy to take the glass-half-empty view, i.e., that young people don’t see investing as a way to make money at this point in their lives. However, there is another view, a more encouraging one — almost 30 percent of young people, i.e., those earning the lowest wages of their careers, have taken responsibility for their futures and do see investing as a viable way to prepare for their later years.
Either way, this is the group which stands to gain the most by getting an early start with their investing. Getting them to engage in any form of investing at all — even if it were only to hold funds in certificates of deposit — would benefit them. If history is to repeat, more people from the younger cohort can be expected to start, or increase, their investing. However, that is by no means a certainty.
In order to get a better grasp of investing strategies, as compared with respondents’ ages, it is possible to group the investing strategies into the following three categories:
- Passive (I let others invest for me)
- Semi-passive (index funds)
- Active (all other strategies)
There seems to be a clear relationship between age and the degree of active involvement in investing. To test this, it is possible to construct a somewhat crude index of active involvement in investing strategy out of our results, by assigning a numeric value to the degree of passivity/activity in investing, as follows:
1 = Passive (I let others invest for me)
2 = Semi-passive (index funds)
3 = Active (all other strategies)
Using those numbers, it is possible to create an “index of active involvement.” A value of 1 would signify a completely passive approach to investing, and a maximum value of 100 would apply to investors with no passive elements in their strategy.
Using that definition, the following chart highlights the correlation between age and active involvement in respondents’ investing habits:
The survey didn’t explore the reasons why younger people tend to prefer a more passive approach, but a few potential reasons could be:
1. Older people have gained more knowledge and experience in their lifetimes, which would give them the confidence needed to take a more active role in their investing.
2. Younger people are earlier in their earnings cycle and the amount they have invested doesn’t justify the expense of employing a paid financial adviser.
3. Younger people’s investments tend to be dominated by employment-related retirement funds, which lend themselves to simple and passive investing strategies. Often, older people have acquired other monies, such as inheritances, settlements, proceeds from the sale of homes, and other sums which exceed the statutory limits for retirement funds. Consequently, they may feel the need to take a more active role in their investments.
That said, it is significant to observe that around 15 percent of the oldest group, i.e., those who have survived the 1987 stock market crash, do not invest at all. These are people who have been in the workforce for more than 25 years, which would put them in their 40s or 50s today. Those tend to be peak earning years, and one would think that the urgency of the approaching years and higher incomes would lead almost everyone in that age bracket to be investing. That, however, is not the case.
The survey didn’t probe the reasons the older group chooses not to invest, but it could be due to people depleting their retirement accounts because of illness, job loss, child-related emergencies or other misfortunes. Whatever the reasons, the fact that around 15 percent of those soon to retire have no investments has to be of concern.
Consistent with what other surveys show, more than 40 percent of all respondents reported that they don’t invest at all. This was most pronounced in the youngest age group, but not insignificant in the oldest age group.
Among those who invest, the most popular strategy is purely passive, i.e., letting others do their investing for them.
A noteworthy observation is that, across all age groups, index fund investing is nowhere near the most popular strategy.
An interesting observation is that, as people get older, they tend to move away from passive to more active investing strategies.
What is your investment strategy?