ComparisonAdviser recently conducted a study to investigate how investors would react to a hypothetical market drop of 25% over a period of one month. The study aimed to understand how investors’ risk tolerance and investing behavior change based on their age and time horizon to reach their financial goals. The survey was conducted on just over 32,000 participants of varying age groups, and the study’s methodology is available for those interested in further information.
The study found that investors’ actions following a 25% economic decline may vary, ranging from holding their positions to changing their investment strategy altogether. The respondents were given four options to choose from: holding their investments, investing more, shifting to a more conservative plan, or being unsure.
The results showed that almost 31% of people of all ages would hold their investments and wait for them to recover during a sharp downturn. About 18% of investors would use the reduced prices as an opportunity to add more securities to their portfolios. Finally, nearly 10% of respondents would shift to a more conservative strategy.
The study also found that age played a crucial role in the decisions respondents said they would make after a market drop. The younger investors felt more comfortable with any of the options and, thus, showed a higher risk tolerance. Conversely, older investors aged 40 to 60+ were more conservative and were more likely to hold their investments or move to safer strategies.
Another focus of the study is analyzing the influence of one’s time until retirement—ranging from 11+ years to less than two—on one’s behavior during and after downturns. While most would hold, the data exhibited that those closer to retiring were not as likely to invest during a drop or drastically change their strategy actively. According to the study’s author, Brandon Canonica, “This may be due to them feeling the need to preserve the progress they’ve already made or to avoid making any hasty decisions.”
According to the study, an investor’s risk tolerance is influenced by their age and time horizon, which affects how they perceive their reaction to a significant market drop. Younger individuals who have more time to reach their long-term financial goals may be willing to take on more risk. However, as people age and approach important milestones, such as retirement, they may prefer less risk to protect their progress.
