Stock prices too volatile. Young adults opt out of market.

Stock prices have plunged too often in the past decade for risk-averse young adults. Will Wall Street lose a generation of investors?

By , Correspondent

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    MIT Sloan Fellows cast shadows on a projection of the results of their simulated stock market during classes at the Massachusetts Institute of Technology Sloan School of Management in Cambridge, Mass., in 2009. Stock prices are too volatile for risk-averse young investors, who increasingly are looking elsewhere to put their money.
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The students at George Washington University in Washington, D.C., listened as a panel of financial pros laid out their investment choices: stocks, bonds, and so on. But in the question period, some students at the March personal-finance conference were dissatisfied with the options.

"Some wanted to know: 'What else?' " recalls Ben Levy, one of the panelists and president of Young Money, an online personal-finance magazine based in Hunt Valley, Md. "It was the first time that question had come up."

It may not be the last. Amid ferocious swings in stock prices and a sagging economy, data show that young adults – the 18-to-29-year-old crowd known as Generation Y – are decidedly jittery about stocks and currently more risk-averse about investing than any group since the generation that grew up during the Depression.

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Who can blame them? For all of their working lives and, for many of them, much of their teen years, the stock market has done nothing. The dot-com boom of the late 1990s and the frothy years of the mid-2000s each gave way to big market crashes. The Standard & Poor's 500 index was nearly 40 percent lower in early September 2010 than it was in September 2000.

But if Gen-Y takes a time­out on stocks – or, more dramatically, becomes a lost generation for the equity markets – that has huge implications: for them and everybody else. Stocks are one of the few investments that have handily beaten inflation over the long term. So if Gen-Yers don't buy equities, how will they put their children through school and save for retirement?

Baby boomers face the flip side of the problem. "A lot of that generation's portfolios consist of stocks," says Sam Stovall, chief investment strategist of Standard & Poor's Equity Research in New York. So if an entire generation doesn't buy stocks, that means fewer buyers for the equities that boomers sell to fund their retirement.

How skittish are Gen-Yers (also known as Millennials)? Only 17 percent were "somewhat" or "very comfortable" taking risks with investments by accepting volatility in hopes of higher returns, according to July field research by Hearts & Wallets, a Hingham, Mass., consultancy for the financial-services industry. That percentage was lower than those of Generation X (27 percent) or boomers (26 percent) and on par with that of the "greatest" generation, which grew up in the 1930s.

Those attitudes are coloring Gen-Y's investing. Some 52 percent of Gen-Yers think the stock market is not the best way to save for retirement because it's too risky, an Allstate Corp./National Journal Heartland Monitor poll found this past spring. When asked how they'd allocate $100 to spend or save "to help build a solid financial foundation," respondents put the largest chunk into bank savings, followed by debt repayment. Of the five choices, stocks drew the least amount. According to Hearts & Wallets, 44 percent of Gen-Yers "don't own/have no interest in" stock mutual funds.

To be sure, many Gen-Yers have stock holdings through their employer's 401(k) retirement plan. But evidently 20-somethings are more reluctant to contribute to those plans than employees overall. According to consultant Hewitt Associates in Lincolnshire, Ill., just over 40 percent of workers in their 20s – versus 28 percent of all plan participants – didn't allot enough to their 401(k) plan last year to get the full employer match. By not saving a little more, they're turning down free money – and not taking full advantage of what have been long-term historical gains from stocks.

"They're ignoring the sage advice about starting [to invest] at a younger age to get compounded returns" over time, says John Patton, a business professor at Florida Institute of Technology in Melbourne.

Even Gen-Yers who may want to invest find it challenging. "These days, it seems harder to save and have capital to invest," says Anne Rosner, a 27-year-old New Yorker in the fashion industry. "A lot of times, we're living paycheck to paycheck. If we save it's for a special purpose or for emergencies. But we haven't tied up money in the stock market. I hope that changes."

Experts debate how long it will take for Gen-Yers to embrace stocks.

"You will see a shift in thinking as Gen-Yers move to the next stage of their lives: owning homes, having children, and having increasingly complex investing needs," holds Ron Shevlin, a senior analyst at Boston-based Aite Group, a research and advisory firm for the financial-services industry. Turning to advisers "will lead them into the stock market. And a recovery in the market will help generate greater confidence in it."

Others aren't so sure. "It will probably take five to 10 years of significant, consistent upward growth in the Dow for this generation to actively consider stock investing as the best use of their money," says Brent McGoldrick, of FD Americas Public Affairs in Washington, who conducted the Allstate/National Journal poll. After what they've seen, "they are very skeptical ... that stocks are the best long-term investment vehicle."

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