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Your Unique Version of Investing History

How we think about investing has more to do with our personal experiences than we realize — and while we can’t change our inclinations, we might be able to influence how we react to them.

Articles by Morgan Housel

By Morgan Housel
Partner, Collaborative Fund  |  Published: July 19, 2019

What we tend to think about investing is based on personal experience and social context.

Investors’ willingness to take on risk is often affected by the generation in which they were born and stock market performances during that time.

Bill Gross, the former head of Pimco, is considered by many to be one of the best bond investors of all time.

But one of the most important questions for all investors is: How much is luck, how much is skill?

The Financial Times recently interviewed Gross. “Gross admits that he would probably not be where he is today if he had been born a decade earlier or later,” the paper wrote. His career coincided with a generational collapse in interest rates that gave bond prices a tailwind.

There’s an important point here that’s relevant for all investors, not just former bond kings.

So much of what we think about investing — our baseline knowledge — is guided by what we’ve experienced. And what I’ve experienced as an investor is different than what my parents have experienced, which is different from what their parents experienced, and so on.

Your birth year influences how you think about investing.

This is especially true if we look at the early years of an investors’ experience, when you’re an impressionable blank slate, heavily influenced by the random experiences of your generation.

Take this chart. It shows what the S&P 500 (and a historical recreation of it by Yale economist Robert Shiller) did during your teens and 20s — your young years when you’re just starting to learn how the stock market works — based on what year you were born. These returns are adjusted for reinvested dividends and inflation:

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If you were born in 1950 the market went nowhere in your teens and 20s, adjusted for inflation.

If you were born in 1970, the market increased almost tenfold in your teens and 20s, adjusted for inflation.

Do you think these two groups of investors — each just as smart, educated, and motivated as the other — will go through the rest of their life thinking the same thing about the stock market?

Thinking that it’s capable of the same return? Or has the potential to unleash the same risks?

The evidence is: No. They won’t. They’ll go through the rest of their life with different views on risk and return just because they happened to be born in a different year.

Investing risk could be based on your generation.

A group of economists once looked at generations’ worth of data on stock market and economic returns, and matched it with how those generations viewed investing risk later in their life.

A summary from their research: “Our findings suggest that individual investors’ willingness to bear financial risk depends on personal history.”

More to the point: “Birth-cohorts that have experienced high stock market returns throughout their life report lower risk aversion, are more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks.”

And that’s just their future view of risk. We’re not even talking about the impact the actual investing experiences had on these generations’ ability to accumulate wealth.

If the last 15 years before you retired were the late 1960s through the early 1980s, both stock and bond markets were abysmal. It may have influenced not just your outlook and perception of risk, but your ability to retire at all.

That’s a dynamic that other generations didn’t have to face. The generation that retired in the late 1990s enjoyed a bull market that supercharged their wealth just as they were stepping out of work, when it mattered most.

There are two important takeaways here.

1. Your experiences permanently shape your investing biases.

The differences in generational experiences are completely out of your control. No matter how hard I try, I can’t look past the experiences I’ve had as an investor that came about through the luck of when I was born. They’re ingrained in me. And no matter how hard I try, I can’t fully comprehend the experiences of, say, someone who grew up during the Great Depression. You had to live through it to fully understand it. Psychologist Daniel Kahneman put it recently, “Anything you experience is so much more vivid than if you’re just told about it.”

This is why I say everyone has their own unique version of history: You can study the past and what others have experienced, but what you’ve experienced personally has the most profound influence on your views of things like risk and reward.

2. Tackling your biases means diversifying your investments.

These examples should highlight the importance of diversification. If you’re from a generation that had a miserable experience with a particular asset — bonds if you came of age in the ‘70s and ‘80s, stocks if you came of age in the 2000s — it can be tempting to write off the asset altogether. But diversification is, to some extent, a hedge on your own confidence. You may not be fully diversified unless you question why you would want to own some of the assets in your portfolio.

It’s a big world, and all of us have only experienced a tiny fraction of it. Realizing that others have experienced a different world than you have is a step toward acknowledging what you may not know, and why not knowing it justifies a more diversified investing approach.

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