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Will financial crisis shape direction of investors with lifetime of choices to make?

This article first appeared in the St. Louis Beacon, June 17, 2009 - The severe economic downturn has been particularly unnerving for Baby Boomers on the verge of retirement who have watched their investment accounts shrink and home prices plummet. What about its effect on their sons and daughters who are early in their earning years and forming investment strategies for the longer term?

It’s easy to understand why people in their 20s and 30s might be shell-shocked from the events of the past year and want to play it safe. Doing so could mean investing in traditionally less risky vehicles such as U.S. treasury bills or bank CDs. If the history of young adults' post-financial-bust investment habits is a guide, a drop in stock market participation might be substantial.

As a recent business columnist asked: “Are we in the process of minting a new generation of adults who are averse to taking chances, whether it’s buying real estate or investing in stocks?”

Only time will tell. But some financial advisers are already warning young people with a risk-averse mentality toward investing to think twice. Their message: Because you’re in it for the long haul, there’s no reason to be as cautious as your parents are being now.

“They may as well get in with both feet because it’s going to be at least 40 years until they need to use this money,” said Tim Souhrada, a St. Louis-based financial adviser with Wells Fargo Advisers.

Souhrada explains to young investors the importance of setting aside both short- and long-term funds. “Being conservative now is OK if you need money in the short term,” he said. “But people who are safer over time -– they are the 95 percent of people who follow the crowd and don’t get ahead financially.

“When people are scared,” he added, “that’s the time to move in,” and take some investment risk.

Moving in, as Souhrada describes, could mean a number of things -- buying a home, for instance. Deals can be had on properties that just a year ago could have seemed out of a young couple’s price range. Then there’s the allure of finding an undervalued stock.

Ashley Weber, a 29-year-old who works in community development for U.S. Bancorp, said she isn’t noticing any hesitancy to invest among her friends. In fact, she says “people seem really excited about getting into online trading as a fun gamble.” (She hasn’t yet.) Some of these young investors, she added, are people who didn’t put much in the stock market before but who are taking advantage of low trading commissions and stock prices.

“In my opinion, it’s dumb if someone my age isn’t investing in the stock market right now,” she said.

Souhrada said he sees some young people jump at the opportunity to find deals in the stock market. Others, however, “are very scared with what’s going on.” He often tells young clients that even if they lose some of their assets in the short term, putting money away into slow-growth accounts doesn’t allow them to get ahead in the long term.

Brian Betker, chair of the department of finance at Saint Louis University, said he also tells his students to take a wide view of the situation. Over a 60-year period, he said, history shows that only stocks will beat inflation by enough to fund a comfortable retirement.

Betker said his undergraduates and MBA students, “all of whom were of course a little shocked at the implosion in the financial markets ... seemed convinced in early 2009 that stocks were on sale” and had the potential for attractive long-run returns.

At this point it’s worth mentioning that Weber and her friends, as well as Betker’s students, aren’t your average 20- or 30-somethings when it comes to investment knowledge and strategy. Both Weber and Betker acknowledged this in the course of their interviews. Finance students, past and present, can fairly be expected to take more risks and have a better sense of their investment options.

There’s undoubtedly a substantial core of young people who will continue to stay on the sidelines or begin sitting out stock market investing. What, if anything, will this mean? Betker said in the short term, because 20-somethings tend not to have much in the way of investable income, “in the aggregate I don’t see it affecting prices much if they avoid stocks.” The big effect, he said, would come later “when they discover they can never retire.”

Betker said young people need to be aware that “in the age of the 401k plan they are largely responsible for funding their own retirement (defined benefit pension plans are going away; and problems with Social Security solvency are not going to get better any time soon).”

Weber said she and her friends are contributing as much as they can now to their retirement accounts to take advantage of the lower cost of equities. Betker tells students that they are better off saving a lot and earning average returns than having a brilliant investment strategy but only investing $10 a month.

“Unfortunately, to 'save today' means to 'not spend today,' so that message isn’t tremendously popular (at any age),” he said in an email.