Each generation of Canadians grows up under a unique set of circumstances. These distinctive backdrops can affect the views they have on a host of topics. Investing is no exception. For example:
- Each generation is at a different point in their investment journey, with a different time horizon. Time horizon relates to the number of years before you reach your financial goal(s). This can influence your investment choices and approach – as well as your ability to take on risk (called your risk capacity). Check your risk capacity by taking this quiz now.
- The state of financial markets during the early years of each generation’s investment horizon has been shown to have long-term implications on investor behaviour. Each generation’s experience when starting out will be different based on market performance during those early years.
To help visualize, let’s take a closer look to see how this has played out across the three main generations of Canadians.
Explore investment experiences across generations
Began investing in the 70s
Growing up in the aftermath of World War 2, this generation entered adulthood with an economy that was on the rise. Expanding automation and industrialization changed the economic landscape. In addition, Boomers enjoyed favourable returns from financial markets.
- Beginning in 1971, Canadian equities averaged annual returns of 10.6% over the ensuing 20 years.
- Long-term Canadian bonds returned an average of 10.0% during this same time period.
That said, these strong investment returns were only part of the picture. Baby Boomers quickly learned they would need to stay invested through years of heavy losses, including a 25.9% equity pullback in 1974, to capture these impressive results. What’s more, they had to contend with runaway inflation in the 1980s that reached double-digit levels – including a spike to 12.5% in 1981.
Began investing in the 90s
Despite a recession in the early 1990s and a Canadian economy that was slow to recover, the eldest members of this cohort entered the markets at a time of exceptional returns.
- Canadian equities averaged annual returns of 10.6% throughout the 1990s.
- Long-term Canadian bonds returned an average of 11.6% during this same period.
However, this rosy period was followed by the bursting of the dot.com bubble in 2000 and nearly three years of steep losses – propelled by the effects of 9/11 and a string of accounting scandals. One positive development: inflation started to come under control in the 1990s.
As a result, the investing experience of Gen X investors depends on when they entered the market.
Began investing in the mid-2000s
Perhaps more than any generation before it, the financial lives of Millennials were largely impacted by a single event: the Global Financial Crisis of 2008-2009. This brought both opportunities and challenges for this cohort. On one hand, Canadian equity markets were essentially cut in half during the crisis, providing Millennials with a very low entry point into markets.
However, the slow economic recovery coming out of the crisis put a cap on wage growth. Meanwhile, housing prices remained elevated in certain parts of the country. These factors left Millennials with less money to take advantage of the opportunities presented in financial markets.
How have these experiences affected each generation?
As a result of these and other competing factors, each generation has tended to approach investing a little differently.
S&P/TSX Capped Composite Index, historical performance
Research shows:
- Millennials are often more conservative when investing. Yet they may have the capacity to take on more risk as an investor because they have the longest time horizon.
- Many Gen Xers had positive early experiences in the markets. For others, negative experiences have had a bigger impact, leading to lower confidence in their financial futures. Overall, this generation describes their approach long-term investing as “somewhat conservative.”
- Baby Boomers tend to have a more aggressive approach towards long-term investing. This behavior is seemingly at odds with their time horizon and risk capacity.1
Basing decisions on generational biases can hurt investors in much the same way that reacting emotionally to market drops can lead to poor investment decisions. For example, depending on the nature of your early experiences in the market, you may have locked in to a view of investing that is no longer applicable. This is an investor bias called “anchoring.” It can affect your investing results in the same way that panic selling can hurt your returns.
Other interesting considerations across generations include:
- Retirement saving. The phasing out of Defined Benefit pension plans means that younger generations must fund a larger portion of their retirement paycheck themselves. Many Boomers benefited from generous lifetime pensions.
- The evolution of investment products. When Baby Boomers began investing, a traditional balanced portfolio consisted of local government bonds and domestic equities. Throughout each generation, the variety of investments available to build a diversified portfolio has continued to expand.
The balanced portfolios that welcomed each generation
One thing is clear: there are many factors that affect the way you invest. Generational experience is just one of them.
To learn more, explore two common mistakes investors make and five principles on how to invest your money successfully.