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Fallout: The Financial Crisis

Young investors wary of stock market

Stacey Vanek Smith Aug 27, 2010
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A worried investor. iStockPhoto
Fallout: The Financial Crisis

Young investors wary of stock market

Stacey Vanek Smith Aug 27, 2010
A worried investor. iStockPhoto
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COPY

TEXT OF STORY

Tess Vigeland: Don’t look now, but the Dow slipped below 10,000 again this week. It’s enough to bring on flashbacks to the four-digit days of March ’09. The difference this time around, though, there aren’t nearly as many investors to care about it. The Investment Company Institute found we have withdrawn more than $33 billion from the stock market mutual funds this year. For older people who don’t have as long until retirement that makes sense. But what does it mean for young investors who are decades away from their golden years.

Marketplace’s Stacey Vanek Smith has our story.


Stacey Vanek Smith: Gen X and Gen Y investors may not have gotten stung by the stock market crash the way their boomer parents did, and they still have lots of time to build their retirement savings back up. But all the same, they’re feeling a little gun shy.

Twenty-five-year-old social worker Alison Reilly just opened a retirement account. She says, she doesn’t want to put her money in the stock market.

Alison Reilly: Everything seems a little uncertain to be putting my money in a risky place.

All that risk aversion has younger investors behaving like their parents, says Alicia Munnell, director of the Center for Retirement Research at Boston College.

Alicia Munnell: My view is that it’s just scary out there and I think that’s what most people think.

Munnell says young investors are pulling money out of stocks, which are risky, but tend to generate bigger returns and putting it into bonds — safer, but with a smaller pay-off. Last month, investors pulled roughly $14.5 billion out of stock market mutual funds.

But playing it safe can be dangerous, says Stuart Ritter, a financial planner with T. Rowe Price. He says the stock market is still the place where investors get the most for their money.

Stuart Ritter: Stocks historically have been the asset class that provide the greatest potential gain. Your biggest risk of not being able to buy the things you want to buy in retirement is not what the stock market does in the next two or three years. It’s how vastly prices are going to increase over the next several decades. So equities are appropriate to handle that.

Ritter says if young investors don’t put money into stocks, they’d better be prepared to save a lot more for retirement.

Ritter: If you decide, well, I’m not going to be in the stock market, even if you have a very long time horizon. That’s certainly a choice, but now you’ve got to make up for that by saving more of your own money.

Which you may have to do in any case. Retirement expert Alicia Munnell says young investors should count on putting more money aside for retirement than their parents did.

Munnell: I think during the 90s, we got lulled into the notion of thinking that planning for retirement was pretty cheap. You put in small contributions and you earn 10, 15, 20 percent on your money and you could get a big pile. And I think what’s happened here is that we’ve suddenly realized that saving for retirement is going to be really expensive.

Especially given what’s happening now. Munnell says the bad economy’s pushed interest rates so low, it’s very hard to protect yourself and get a decent return. Twenty-five-year-old Alison Reilly tried to avoid the stock market, but found it was just too costly.

Reilly: I had a CD, but recently mine came up for renewal and they only offered like 1.4 and that was so pathetic. So it’s, you know, back to the stock market, I guess.

T. Rowe Price’s Stuart Ritter says there is a middle ground — put a little more money in CDs, bonds and other fail-safes. You will have to save more, but you may also be able to sleep a little better at night.

In Los Angeles, I’m Stacey Vanek Smith for Marketplace Money.

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