The more experience an investor has, the fewer risks they’re willing to take, a new survey finds
A new Fidelity study found that conservative investing practices are correlated with age, but more strongly correlated with investing experience.
Gaining more experience as an investor doesn’t necessarily mean you’ll start adopting advanced trading techniques, like incorporating derivatives into your portfolio. In fact, the opposite may be true – the more experience you gain as an investor, the more set in your ways you may become.
Financial-services firm Fidelity Investments recently released its annual State of the American Investor report, which surveyed over 2,000 individual investors. Fidelity asked investors about their investing strategies and how they viewed their portfolios.
Interestingly, Fidelity saw a significant difference in the responses from novice investors versus those with more years of experience. Newer investors tended to be more comfortable with risk than more experienced investors.
“I think seasoned investors have been through more cycles of bear markets and bull markets,” Josh Krugman, senior vice president of brokerage at Fidelity Investments, told MarketWatch. “They’ve seen different bouts of volatility and typically are in a stage in their life where they have more money to risk, as opposed to a more novice or newer investor.”
The survey split investors into three different groups: those with zero to five years of investing experience, those with six to 10 years of experience and those with 11 or more years of experience.
It found that 18% of newer investors took a “risk-on” approach, more than the other cohorts. Meanwhile, 24% of experienced investors classified themselves as “risk-averse.”
In addition to risk appetite, investing priorities also seem to shift as investors gain more experience. Some 46% of investors with 11 or more years of experience said their priority was limiting losses, which was the most common response for that experience level. For investors with five or fewer years of experience, 50% said their priority was advancing knowledge of new asset types and trading strategies.
Investors with five or fewer years of experience are represented by the green bar, six to 10 years represented by teal, and 11+ years by purple.
Some of this can be explained by age. Younger investors tend to be more risk-friendly with their strategies, since they tend to have less money to invest but a longer time horizon to watch their portfolio grow. Meanwhile, older investors tend to be more conservative since they often have larger portfolio sizes and may be close to retirement.
Fidelity said age wasn’t the only thing that determined a propensity toward risk. In fact, some older investors tended to be risk-friendly if they were more experienced. For that reason, the survey data showed that experience was more correlated with risk than age alone.
The survey also found that newer investors were often more open-minded when it comes to learning new investing strategies. Novice investors were more likely to report familiarity with advanced income-generating strategies, including fully paid securities lending, bond ladders and selling covered calls. Experienced investors were more familiar with traditional strategies, including investing in dividend-paying stocks and high-yield money-market funds.
As newer investors hunt for these advanced trading strategies, the survey found they were more likely than experienced investors to turn to social media as a source of information. Some 36% of novice investors said that most of their investing decisions were based on ideas from social media, compared with 11% for experienced investors. But these newer investors also know social media isn’t perfect, with almost half of them admitting that they’ve received bad investing advice from social media.
Newer investors are more likely to turn to social media for ideas.
When it comes to comparing newer with more experienced investors, it’s important to remember the limited time frame of new investors in the market. Investors with five or fewer years of experience only know what it’s like to invest during the bull market that started in 2020 and continues today. Investors with less than 10 years of experience haven’t invested through a prolonged market slump like the ones in 2008 and 2000.
“[If] you’ve been through multiple bear markets and bull markets, you know your portfolio doesn’t always go up double digits every single year. But if you’re newer, and the only thing you’ve experienced is significant bull markets, then you may not have that same perspective,” Krugman said.
This difference in market expectations may also be the result of a generational shift among the new wave of retail investors. Investors who entered the market in the past five years did so at a time when technology greatly increased access to the market. Investing apps, zero-commission trading and fractional shares have all made it easier for anyone to start investing. This may affect how new investors approach their trading, compared with investors who had experience trading before this technology was widespread.
The new wave of retail investors may also be more optimistic than their more experienced cohort. While 56% of novice investors expect their portfolio to perform better than it did over the last 12 months, only 34% of experienced investors shared the same view.
-Gordon Gottsegen
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