Young Investor’s Wealth Destruction During The Financial Crisis

One thing the financial media gets right (surprisingly) when discussing the behavioral economics of households during recessions is that younger American households “sell low” during periods of distress far more than any other demographic range.

In particular, the white paper “Wealth Disparities Before and After the Great Recession” analyzed the investment behaviors of Americans from 2007-2011 and found that the hardest hit demographic in terms of net wealth over a four-year period was households that involved members in the age 25-34 demographic.

In 2007, the American households that held stock and were in the 25-34 age range had $34,834 in stock market wealth. In 2011, those individuals who were in the 25-34 age range in 2007 had $7,842 in total stocks invested.

Those numbers blow me away. Sure, I’ve seen the anecdotes interviewing people who sell stocks during the recessions and say things like “the stock market is rigged.” And I’ve seen the patronizing attitude towards the young on general financial media outlets. But I had no idea that the 25-34 year-old age group systematically destroyed their household’s balance sheet during the 2007-2011 period to the point that 75% of their wealth was destroyed. The only comparable data point is the Great Depression.

In February 2007, the S&P 500 was at 1,450. In 2011, it was at 1,360. It is staggering to me that, even though the S&P 500 was only down 6% cumulatively over this four-year period, so much wealth was destroyed among America’s young households by selling low (the data does not distinguish between selling stocks out of necessity vs. fear).

This is why I have repeated ad nauseam that you should only buy assets that you understand. I have written dozens and dozens about Coca-Cola stock because I understand a company with 500+ brands and a $250+ billion distribution facility that is responsible for providing 3.5% of the beverages consumed each day in the entire world. It’s at $47 per share now. I don’t care if it falls to $40, $30, $20, $10, or whatever. I know what it is, accept the volatility, and ride on. If I make any investment decision, I hold myself to that standard.

Anytime you make an investment, you have to ask yourself: “Am I positioned to avoid selling during a realistic worst-case scenario that might manifest over my contemplated holding period?” Savings accounts and Treasury bonds yielding 1% or 2% might seem lame and unimpressive, but if the alternative is selling when your stocks declines by 30% to 50%, take me to

In a separate white paper titled “Optimal Financial Knowledge and Wealth Inequality”, the median American household in the 25-34 age range in 2007 whose parents owned some stock had a net worth of $68,393. By 2011? The net worth had actually grown to $104,292.

To the extent that America’s financial elite households are sitting on a secret right now, it is that they have it ingrained into their identity that “you do not sell your stocks.” Those stock certificates and beneficial ownership positions are pried out of their dead, cold hands. Seriously, if you ever notice someone falling out of the upper class, it is almost always in the context of their investment holdings going bankrupt—I can’t think of any wealthy individual who lost a fortunate by deliberately selling after sustained a paper loss. They have the mentality of going down with the ship because they know, if you own dozens of different assets, they might all wobble during the harsh storms and hurricanes but very few will sink.

Unfortunately, the advantages of holding stock through thick and thin is not transmitted to the middle class and lower class through education. So you see people toil for years to cobble a five-figure portfolio, invest in certain stocks, and then sell it when a significant paper loss is generated. Then, the stock market recovers, some years later the economy booms, and they start the process all over again. As the famous Dalbar studies noted, Americans only generated 3% annual returns from 1992 through 2012 while the S&P 500 advanced 9% annually. They just cannot help themselves from selling low.

None of this was intuitive to me. I would have thought the ill-advised sellers would be those at the end of their lives who saw a $600,000 portfolio fall in value to $300,000 because the emotionalism of seeing half of one’s net worth disappear overnight would be overwhelming.

But it’s not. It’s the young people, who have decades of labor ahead of them to create surplus investment funds. It makes little sense to me, especially because the study pointed out that most of the lost stock market wealth was in a 401(k), and most 401(k) have some type of company match. If you have $30,000 in a 401(k), and your employer kicked in $5,000 of that amount over the years, it would take a 33% decline in the value of your portfolio for you to even experience a 20% decline as measured against your contributions. You would think that the 401(k) match would act as a shock absorber that would make it easier to weather volatility, but it certainly wasn’t for America’s youngest households during the financial crisis of 2008-2009.

For those who are younger (and any investor, really), the advice should be simple: Do not sell your stocks now. These companies that you are selling today will be around five, ten, fifteen years from now and many of their stock prices will be doubled or even quadrupled the current stock price. As long as you are the owner of those stocks, you get to reap those excessive rewards. If you sell, you are receiving a low amount of money while you are creating a platform for someone else to build wealth. Every prior American generation that has sold low has come to regret it.

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2 thoughts on “Young Investor’s Wealth Destruction During The Financial Crisis

  1. Mike says:

    Interesting finding! Does the change in wealth look at the same absolute demographic in that time period (e.g. 25-34 in 2007, 29-38 in 2011), or just the current 25-34 demographic at the start and end points? I imagine people moving into that demographic during the great recession who had trouble finding jobs may have started at $0 and not contributed anything, dragging down the average.

  2. Three years ago or so I read this book called how to get rich by the deceased Felix Dennis. One of the chapters I remember quite clearly. Basically ownership is everything and he would never give up a single share in any of the companies that he owned. Not to his dying mother. Not to save a relationship with his brother. Not for any reason, do not give up a single share. It has always stuck with me. He may have meant it in terms of raising capital when starting a business, but I’ve always ran with it in terms of my portfolio, including a certain industrial company that is getting hammered…the chapter had such a powerful effect on me.

    Thanks for your good articles during this time of Crisis.

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