Thursday, January 6, 2011

Gen Y's Risk Aversion

A recent Kiplinger's article points out that Gen Y investors are typically more risk averse than other generations were when they were the same age. This risk aversion means just what it says - Gen Y investors are less comfortable with risk - and in turn have put more than half of their savings in relatively safe investment vehicles like "bonds, money market accounts or cash" as the article points out.

The article also goes on to examine the reason for this risk aversion, pointing out the following:

"They've seen little or nothing of the upside of long-term investing in stocks. In the decade since the oldest Gen Yers entered the workforce, the stock market has languished. Worse, many saw their parents' savings evaporate in recent years. If that reluctance to invest in the stock market lasts, many will come up short in their golden years."

While I'm sure the roller coaster ride that the stock market has taken investors on in the wake of the financial crisis was unsettling for many investors, I believe Gen Y's risk aversion boils down more to their temperament and personality. After all, Gen Y tends to have a shorter attention span and a burning want for instant gratification. Maybe they simply don't understand the benefits of investing the stock market and don't have a desire to learn. As a result, they park their cash in relatively risk-free vehicles like CDs and money markets, earning a meager return that can be eroded by inflation.

If Gen Y investors aren't motivated to learn about the importance of taking on at least some risk for higher potential investment returns over the long-term, it will be very difficult to change that mindset since it's probably ingrained in their psyche already. It can be done, however, and I remind readers that while risk aversion can be important, it's simply not practical for Gen Y investors.

We have the most to gain when investing because we have time on our side. However, in order to utilize that time we need to take some risk so that we can be compensated for bearing that risk. A time-tested investment principle continues to hold true, all else being equal: greater risk equals greater potential reward.

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