Coming of age during a disastrous decade for stocks is shaping a generation of ultraconservative investors, and they're shunning the equity portfolios of their parents for the hiding places of their great-grandparents.
It's ironic, to say the least. Americans in Generation Y -- definitions vary, but generally those born from 1977 to 1994 -- have grown up with X Games and globalization. They spend their time paragliding in the Alps or snowboarding on half-pipes. They fearlessly dine on mystery meat bought from street vendors in Mongolia and run careers off laptops fired up in Internet cafes in Southeast Asia.
"Holding on to the coping behaviors that you learned in a crisis almost always proves to be a disaster in the long run," said Brad Klontz, a Honolulu psychologist who specializes in money disorders. "It's like soldiers who learn to distance themselves from what's going on around them to cope in a war. If you use those same coping techniques when you return, it will destroy everything else in your life."
It's overly dramatic to say that investing like a scared rabbit could ruin your life. But it could certainly affect your ability to free yourself of the working world anytime before you draw your last breath.
Nothing ventured, nothing gained
Seasoned investors also say it's a shame because young investors could potentially amass a fortune by being aggressive in bad times like these. And they're likely to need a fortune, because of crumbling public and private pension systems that other generations were able to lean on to help support them in their old age.They'll need to rely more on what they can create with their 401(k)s and individual retirement accounts than their parents or grandparents have had to.
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Yet scared-rabbit investing is almost all that Klontz is seeing, with 20- and 30-somethings putting their retirement money in bank accounts, Treasurys or gold to simply "preserve" their savings.
Other advisers report much the same. Their youthful clients maintain they're too poor to risk throwing good money after bad. Growth? It's hard to believe in.
When stock values dropped in half amid the mortgage mess, youthful investors fled to the safety of bank deposits.
80% without even a 401(k)?
Of course, whether this anecdotal evidence relays an accurate picture of an entire generation is difficult to know. Getting reliable, up-to-date data on what different generations of investors are doing with their money is tricky because most official data are released years late, and survey data are notoriously inaccurate, said Dallas Salisbury, the president of the Employee Benefit Research Institute in Washington, D.C.One reason: Financial jargon is about as familiar to an ordinary American investor as Punjabi. (What's that, you ask? Exactly.) Ask individuals whether they're invested in money markets or equities, for example, and you're likely to get a wrong answer because they don't know the difference, Salisbury said.
Indeed, when the Transamerica Center for Retirement Studies recently asked members of the cohort it defines as Generation Y -- those born from 1979 to 1986, a narrow slice -- what they were invested in, the largest group (31%) said they didn't know.
Of those who thought they knew, 48% were at least half invested in supersafe vehicles such as cash, bonds and money market accounts. Only 22% were mostly invested in stocks, as most advisers would recommend.
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Fidelity Investments, which compiles data on participants in its own retirement plans, sees less conservatism among Generation Y but concedes that its data reflect a small subset of the population. Only about half of all workers have access to a 401(k) plan, and only about 40% of the 20-somethings who are offered a 401(k) even participate, said Michael Doshier, the vice president of marketing for Fidelity's workplace investing group in Boston.
That leaves roughly 80% of Gen Y members investing outside workplace retirement plans, if at all. And, anecdotally at least, they're saving in bank accounts and similar low-yielding vehicles.
It's a generation that might as well be stuffing its money under the mattress.
"They're spooked," Catherine Collinson, the president of the Transamerica Center, explained of the ultraconservative bent taken by these youthful investors. "It's not just stock valuations but the number of Ponzi schemes that have come out lately. People are naturally rattled."
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