Gen Y: plenty of time to invest, but little appetite for risk

Posted by on January 13, 2012 @ 3:05 pm in Investing

Along with about 50 million others, I’m a product of Generation X. I had a Dorothy Hamill haircut, spent my weekends at the roller-skating rink, and grew up watching Madonna on MTV (back when she was more controversial and they actually aired videos). And while there are plenty of characteristics—not all of them positive—broadly attributed to the “slackers” and “latchkey kids” of my generation, we’re generally turning out OK.

In fact, I’ve been thinking a lot lately about how lucky I am compared to my younger Gen Y counterparts. The roughly 77 million young adults, or “Millennials,” now between the ages of 18 and 30 sometimes get knocked for being coddled by their well-meaning “helicopter” parents. And maybe that’s true. But, I feel bad for them anyway. They’re well educated and technology savvy, but they can’t find jobs. They’re generally more diverse, well traveled, community minded, and environmentally conscious than members of my generation … and they still can’t find jobs. The overall unemployment rate just dropped to 8.5%, but the rate for Gen Y job-seekers between the ages of 18 and 24 still sits well above the national average at 15.8%. Who’s being coddled now? Those lucky enough to land a job and make small contributions to their first 401(k) have been rewarded with extraordinary market volatility. But, that’s the thing. They don’t know it’s extraordinary. And it’s souring them on equity investing.

A recent Forbes article reports that 40% of Gen Y investors agree with the statement “I will never feel comfortable investing in the stock market.” Wow, never?! The article states that the average Gen Y investor holds 30% of their assets in cash, an allocation more consistent with an aging boomer than a twenty-something. While their stance on the equity markets may eventually soften, it’s a strong indication of the understandable—but really unfortunate—risk aversion that now plagues many Gen Y investors.

Perhaps by sheer luck of my birth year, my experience was different. I graduated from college in 1994 and was offered a job directly related to my field of study. With paycheck in hand, I dutifully contributed to my first 401(k) and watched my account balance grow steadily through the remainder of the nineties. In hindsight, I probably grew to expect the healthy returns that I was enjoying. (Not to worry, my market naïveté dissipated quickly when the tech bubble burst in early 2000). Like many investors, my earliest experiences—both good and bad—helped shape my views on risk tolerance.

Unlike today’s Gen Y investor, I directly benefited from several consecutive years of portfolio growth fueled by equity returns. That experience bolstered my long-term confidence in the markets when things got shaky in the early 2000s. In fact, those early market observations—coupled with another 15-plus years of investing experience—still sustain my faith in today’s volatile market environment.

In one of my prior posts, I urged investors spooked by market volatility to consider shortfall risk before investing too heavily in cash. I didn’t have Generation Y in mind when writing that post, but young investors who shy away from equities should heed the same risk. Generation Y’s collective experience with the economy and the stock market has been brief but intensely unpleasant. It’s no mystery why they’re avoiding equities; I just hope we can convince them otherwise in relatively short order. Because one clear benefit of youth—and the 30–40-plus-year investing time horizon that comes along with it—is the ability to weather near-term volatility in exchange for potential long-term asset growth.

Note: All investing is subject to risk. Past performance is not a guarantee of future results.

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