Stock Market Abandonment: Is the Shift to Conservative Investing Wise or Shortsighted?

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A CNNMoney story says that there has been a dramatic decrease in the number of young investors willing to take on risk—meaning putting money into the stock market. In 2001, 30% of Americans younger than 35 said they were game for investments with substantial risks, with the idea that with great risk came great possibility of a bigger payoff. As of 2009, only 22% of folks younger than 35 said they were still up for such risky, totally non-guaranteed investments.

Traditionally, the younger you are, the more willing you are to take on risky investments—which makes sense (in theory) because when you’re young you typically have fewer financial and family responsibilities, and you’ll have more time to wait out the ups and downs of the market so that investments have ample time to pay off. But nowadays younger investors are more likely than other age groups to be shying away from risk, per the CNNMoney story:

A recent Merrill Lynch survey of 1,000 affluent Americans, who boast more than $250,000 in investable assets, showed 56% of young investors consider themselves to be more conservative today than they were a year ago — the highest percentage among all age groups.

What with tons of Americans pulling money out of the stock market, USA Today speculates that we could be looking at a “lost generation” of investors who may never return in full force to stocks:

Anti-stock sentiment is also evident in the soon-to-be-released 2010 Scottrade American Investor Study… Nearly one of three investors (31%) said they were “investing less money” or “investing more conservatively.” The most conservative investors of all: Gen Y (18 to 28 years old) and Gen Xers (29-45), the study found.

When discussing Gen Y and Gen X, “conservative” isn’t a term you’re used to hearing. That goes for cultural and financial issues. But there it is nonetheless.

One obvious reason these folks have become more conservative investors is that they simply have less money to invest nowadays. Chances are they’ve been affected by recession-related layoffs, downsizing, work furloughs, pay cuts, the tanking of the housing market, or just the broad national awakening to the foolishness of not paying off debt—credit cards in particular.

The problem with abandoning the stock market entirely is that it is difficult to put together a portfolio that produces without taking on some risk, as a Kiplinger story states:

For starters, the supposedly safe alternatives aren’t especially appealing. The national average interest rate on a five-year CD is 1.8%. A few banks advertise 2.5%. Such a deal! If there’s any inflation at all and your money is in a taxable account, you make between nothing and next-to-nothing.

The question is: Are you more comfortable with the possibility of losing money in the stock market (which comes with a corresponding possibility of building substantial wealth in the market), or with the idea that you’re just treading water (in which you won’t drown, but you won’t really “win” either).

In case you haven’t already learned this obvious lesson over the past couple of years, unfortunately this is no such thing as easy money.

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