Gen Y should read

let your next generation read this article and heed such warnings.

Why Generation Y fears the stock market

Commentary: Coming of age amid two crashes, you would too

By J.J. Zhang  who is a chemical engineer and amateur financial adviser who was the winner in MarketWatch’s second annual World’s Next Great Investing Columnist contest. He runs the blog MarketTech Reports. You can follow him on Twitter @MarketTechRpts . 

One of the largest transfers of wealth between generations is starting to occur in the U.S. As baby boomers enter the retirement phase, the next generation of workers, Gen Y or the Millennials (those born in the 1980s and 1990s), are now entering the workforce and beginning their prime earnings

Generation Y fears the stock market, the result of coming of age during several major financial crises. 

According to research group CEB Iconoculture, Gen Y comprises over 76 million people with almost $900 billion in spending power. In contrast the baby boomers, also numbering 76 million, have $2.5 trillion in spending power.

However, for this new generation, it’s a very different world than the one seen by their parents. The baby boomers saw the rise of the U.S. into the world’s only superpower and all the accompanying economic growth and rewards that came with it. 

They reaped the rewards of the chemical revolution, the golden age of manufacturing, the computer revolution, the information age, energy abundance and globalization. They also juiced growth via the use of debt which turned the U.S. into today’s debtor nation. 

In contrast, the future outlook for Gen Y is that of a nearly bankrupt nation, rising global competition from emerging countries, crumbling infrastructure and insolvent retirement and welfare programs, among others ills. For this generation, financial security is a fragile hope due to high educational debts, stagnant upward social mobility and poor employment prospects. 

For Gen Y, it becomes even more important to start retirement planning early as government Social Security guarantees, employment security and wage-growth prospects will not be what their parents experienced. 

Posttraumatic stock syndrome

However, this generation has also suffered through several financially traumatic experiences that have and are continuing to shape its investing views.

Baby boomers saw a relatively stable and strong growth period during the ‘50-’70s which influenced their long-term belief in market returns. In contrast, Gen Y adults experienced two major bubbles and recessions and high volatility, which have led to one lost decade already. 

Indeed, the early vanguard of the Gen Y’ers joined the real world only to experience the dot-com crash. They subsequently started investing in their mid 20s only to find the housing bubble and the subsequent great recession. The first impression is the most important and so far it doesn’t look promising. 

This lack of tangible gains, roller-coaster volatility and recent scandals such as the bank bailouts, mortgage shenanigans, Ponzi schemes and scandals like Goldman’s designed-to-fail securities, have all made them cynical and distrusting of the stock market and investing in general. 

This isn’t hypothetical. In a recent MFS Survey, 40% of Gen Y agreed with the statement “I will never feel comfortable investing in the stock market.” Among Gen Y investors, 54% feel overwhelmed by available choices and 47% tended to put off investment decisions. 

Due to fear of risk, 30% said their primary investing objective is protecting principal and have allocated an average of 30% to cash, more than other age groups, and nearly equal to the 33% allocated to stocks. T. Rowe Price noted in 2010 that almost one in five self-directed participants age 25-35 had over 80% of plan assets in cash. 

While protecting principal is no doubt important, excessive risk aversion does not lend well to long-term investing: after all, no pain, no gain. With 54% of Gen Y concerned about when they would be able to retire and 44% lowering their retirement expectations, they need to put aside their fears and tiptoe back into the markets. 

What can Gen y’ers do?

Though these psychological traumas have already influenced Gen Y actions, luckily time and youth is on their side. With the first wave still in their early 30s, there’s still plenty of time to start and let compound investing work for them.

The important first step is learning to let go of their fear of the market, or at least reduce it to a healthy level. Yes, the stock market can be a scary place sometimes but there are precious few ways to generate returns significantly above inflation that is necessary for a Social Security-less future. 

Notably, high volatility and risk averseness has caused Gen Y to make more use of financial advisers and other experts. Especially for those concerned about market volatility and risk, seeking a financial adviser to help them tiptoe into investing is a good idea. 

However, it’s particularly important that one find a good and trustworthy adviser — those with fiduciary duty is a must. While advisers do charge fees that can undermine returns, in this case it’s still a net positive over the high cash many Gen Y’ers are holding. 

And keep in mind; advisers are not a lifetime commitment. There’s nothing wrong with learning from them and then striking out for yourself. 

One trait of Millennials is their considerable sophistication in finding information and learning for themselves. The widespread availability of financial products and services such as ETFs, online discount brokerages, instant financial info like real time quotes and new tools such as computer-aided rebalancing have given then all the help needed to create a well-rounded and diversified portfolio ready for the long term. 

It may be we’ll look back from the future and call this the Generation DIY.