The cost of avoiding stocks
Shunning risk by staying out of the stock market could be dangerous for your long-term financial health.
When it comes to investing, younger generations are tending to be more conservative relative to the Baby Boomers. Some young investors are tending to go light on equities exposure, presumably to avoid the risk that equities present. But skimping on equities exposure in an investor's asset allocation may present certain additional risk, depending on a person's time horizon.
Investors age 30 to 44 had just 48 percent of their 401(k) plan contributions allocated to equities exposure in 2009, according to a 2011 analysis by the Employee Benefit Research Institute for SmartMoney.com. That's seven percent less than in 2007.
Why are younger investors so timid?
Glen Young, a financial planner with Ashton Young Financial Services in Troy, Michigan, says young investors' wariness of equities is partly a response to the 2008 stock market slide. "We saw the same thing during the downturn of 2001," he says. "Whenever there is a market downturn, all ages — but especially young people — tend to become more conservative."
Young believes Generation Xers and the generation right behind them, often called Millennials, don't have the experience to understand how the short-term highs and lows of the stock market work. "Investors who haven't lived through periods of high volatility react to it by pulling out of markets," he says.
Randy Welch, Assistant Vice President of Investment Services at the Principal Financial Group®, agrees. "They've seen the market have huge swings over the past five to 10 years," he says of younger investors.
The dangers of avoiding stock
Younger investors' aversion to risk may backfire. Despite the ups and downs of recent years, equities have historically provided a source of growth. Young people who allocate only a small portion of their retirement savings to equities exposure may hobble their portfolio's long-term returns. This could leave them with insufficient funds for retirement.
"They've allowed what they've seen in the short-term in equity investing to limit their investing in the future, and that could be a mistake," Welch says. "They have 30 years until retirement. Over most 30-year periods we have historically seen stocks with an upward trend. If they want their assets to grow, where else are they going to put it?"
Get help from a financial professional