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It’s a Goldilocks moment for investors.

As the books are closed on September, the S&P 500 (^GSPC) has delivered a solid 20% return so far this year. Meanwhile, bonds are up a respectable 4.7%. And cash is yielding a similar percentage return — even after the Fed began cutting rates a few weeks ago.

But new research from Jack Manley at JPMorgan Asset Management uncovers hidden pitfalls, particularly for those entering their investment years during periods of high cash yields (much like the present). His findings suggest that all investors, regardless of generation, are heavily shaped by the market environment they grew up in.

Manley’s methodology, rooted in demographic and behavioral analysis, assumes individuals begin investing 20 years after their generation’s inception. For example, baby boomers started investing around 1966, Gen X in 1985, millennials in 2001, and Gen Z in 2017.

Over the decades, boomers have weathered all sorts of market turmoil, from the inflation crises of the 1970s to multiple tech booms later in life. With average annual stock returns around 10.2% and bond returns of 6.2%, their experience reflects a period of high growth and volatility.

As Manley explained in an episode of Stocks in Translation, “the Fed paid pathological attention” to the inflation crisis, and the entire experience had a profound effect in shaping boomers’ cautious and diversified approach to investing — despite the strong returns.

For Generation X, the journey has been one of boom-bust cycles. But the older cohort of this group largely began investing amid a secular boom in markets. Entering adulthood during the 1980s, they witnessed the rise of tech but also faced brutal recessions, from the dot-com bubble to the 2008 financial crisis.

With returns hovering around 11.6% for stocks, their approach is cautious but optimistic. As Manley noted about the current market environment, “strong balance sheets are very important right now.” This may resonate with Gen X’s preference for financial resilience in uncertain times.

Millennials are the most educated generation, as measured by the percentage with bachelor’s degrees or higher. But they have not fared as well in stock market returns, averaging around 8.0%, according to Manley.

When millennials came of investing age in 2001, the S&P 500 peaked, ushering in the dot-com bust. After stocks roared back amid a housing boom, the global financial crisis created a double top in the benchmark in 2007 that would not be eclipsed until 2013 — leaving millennial investors underwater for a dozen years.

Their outcomes, as Manley highlights, are the worst among the four generations in both stocks and a 60/40 blended portfolio. This underperformance has driven some to believe that traditional investing is “pointless” unless they make “large, risky bets,” such as in cryptocurrencies.

This lack of faith in financial markets has led millennials to embrace higher-risk strategies at the expense of diversification, reflecting their desire for outsized returns.

Gen Z has had the best generational stock market performance (14.1%) but the worst bond returns (-0.5%), which combine to stoke the risk engine that modern markets seem to have become.

Coming of age in a rather eventless year, 2017, they would soon face Volmageddon (2018), a pandemic (2020), stimulus checks, the Reddit/GameStop retail revolution (2021), NFTs (2021), the near-death of cryptocurrencies (2022), and the most aggressive Fed hiking in four decades (2022-2023).

“Generation Z has had a very lopsided experience,” wrote Manley, explaining further that it “may lead to a lack of interest in diversification and a lack of experience with true bear markets, which could result in panic if fortunes turn in the other direction.”

With their portfolios concentrated heavily in high-risk assets like crypto, Gen Z has yet to experience the full brunt of a secular bear market (like millennials faced) — making them particularly vulnerable when economic conditions shift.

The current moment has had an unusual influence on cash as well. One of the key trends Manley discusses in his research is its rising popularity, driven by peak CD rates recently nearing 5%.

“Because of the strong yield and minimal risk associated with CDs today, many investors have decided to allocate more heavily to cash,” said Manley. But he warned, “[I]nvesting at peak CD rates in the past has resulted in underperformance relative to other fixed income instruments.”

Historical data shows that during previous rate hikes, investing heavily in CDs underperforms against stocks or bonds.

Manley advised considering the opportunity cost of cash in a portfolio, adding, “[T]here may be better options for deploying excess capital than in CDs.” Allocating too much to cash can hinder long-term growth, especially in a diversified portfolio.

While what we invest in often make up the bulk of the investing conversation, Manley emphasizes the banal (but underrated) importance of tax strategy, especially for younger generations like millennials and Gen Z. As many advisors point out, the government is every investor’s silent partner.

On Yahoo Finance’s podcast Stocks in Translation, Yahoo Finance editor Jared Blikre cuts through the market mayhem, noisy numbers, and hyperbole to bring you essential conversations and insights from across the investing landscape, providing you with the critical context needed to make the right decisions for your portfolio. Find more episodes on our video hub or watch on your preferred streaming service.

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