Why young clients, in particular, need coaching

Meet the generation of investors who haven’t known a bear market.

The U.S. stock market has been on the upswing for nine-and-a-half years, during which a cohort of younger investors has never dealt with a 20% drop in the S&P 500—the classic definition of a bear market. Such a decline has historically happened on average every four or five years.

Read: Investing tips as bull market becomes longest in history

That’s nice for these 20- and 30-somethings, and their retirement accounts, but it raises the question of what they’ll do when the next downturn inevitably arrives. How they respond will be crucial because this generation bears a heavier responsibility for paying for their own retirement, as pensions go extinct.

Few analysts are predicting an imminent downturn for the S&P 500, which finished Tuesday within 0.8% of its record, but they’re much less confident about 2019 or beyond due to rising interest rates and other market challenges. The fear is that inexperienced investors will panic at their first taste of a bear market and sell their stocks, which would lock in their losses.

For young investors with decades to go before retirement, conventional wisdom says the best bet is to ride through and wait for a recovery. The average bear market brings a loss of nearly 40% for the S&P 500, but it typically lasts less than two years, according to S&P Dow Jones Indices.

Some younger investors say the experience of their parents in the wrenching financial crisis of 2008-2009, when the S&P 500 lost more than half its value, has prepared them for the next downturn. They know the stock market more than made up all those losses, eventually.

They’re investors like Marcus Harris, a 34-year-old physician in the Houston area who started investing about five years ago.

“It’s going to sound terrible, but I’m actually looking forward to the next downturn,” he said of the opportunity to buy stocks at a lower price. “I know it’s an overbought position right now, and I’m just sitting on my hands saying, ‘I can’t wait.’ Hopefully it will go to half the price, and I can gobble up a lot of it.”

Read: Why buy-and-hold investors should be cautious late cycle

He’s somewhat of an anomaly among his peers in that he owns stocks at all. Only four in 10 U.S. households led by someone under 35 owned stocks in 2016, according to the most recent data from the Federal Reserve. Stubbornly low wages and high debt are keeping many younger workers out of the stock market.

Still, the ownership rate among younger households, at 41%, has been on the upswing and is much higher than the 23% rate in 1989. Since then, the only time young investors were much more likely to own stocks was around the dot-com bubble.

“All the ones I know, they do want to get involved,” said Kimelah Taylor, a 36-year-old accounting advisor in Houston who began investing with a financial advisor about four-and-a-half years ago. “There is that delay in when they get involved because they’re paying off student loans and other things.”

Even though younger investors haven’t faced a full-blown bear market yet, they have had a few mini-tests, with two drops of 10% since early 2016. Through them, younger investors made more calls than usual to T. Rowe Price, but they usually stopped short of selling their stocks, said Roger Young, senior financial planner at T. Rowe Price.

Read: As markets drop, here’s how advisors are communicating

If anything, market dips have only emboldened some, said Charles Adi, financial advisor at Blueprint 360 in Houston. During a tumble earlier this year, for example, he was balancing calls from older clients looking for reassurance with younger clients hungry to buy more shares of stock.

“In 2008, it was unexpected,” Adi said. “Now, a downturn is expected. They’re ready for it. They’re waiting for it.”

Still, there is the threat of overconfidence. Maybe young investors’ nerves won’t remain as steady as they expect.

Read: Why advisors should stop talking and start coaching

“They think they’re good fighters,” said Danny Alexander, a financial coach at Stangier Wealth Management in Portland, Oregon, which recently hosted an event for clients called “Gearing up for the next crash.”

“But until they’ve been in a fight and punched in the month, they don’t know how they’ll respond.”

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