Young Adults Invest Conservatively Post-Recession

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Ah, youth. The time for body piercings, staying out late and … a portfolio of ultrasecure T-bills?

Traditionally, we associate the early years with risky behavior—but one consequence of the recession appears to be a shift in the way 18- to 34-year-olds handle money. Affluent millennials and 30-somethings say their tolerance for risky investments is much lower than it was a year ago, rivaled only by people over the age of 65, according to a new study by Merrill Lynch Global Wealth Management. "It truly is a generational change," says Dave Geschke, an executive at Ameriprise Financial. "The market got cut in half. Housing got cut in half. People saw their asset classes get blown up."

Avoiding risk may feel sensible to a generation whose financial coming-of-age has been bookended by the dotcom bubble and the subprime-mortgage meltdown. In 2010, only 41 percent of 18- to 29-year-olds reported working full time, compared with 50 percent in 2006, according to the Pew Research Center. Millennials were more likely to report losing their jobs than workers over the age of 30, and many recent college graduates have had a hard time finding a toehold in a tight labor market, even as the national unemployment rate rose Friday to 9.6 percent. If the 18- to 34-year-olds feel more cautious about investing, it's partly because they have less money to spend and little economic security.

In response, financial firms have begun tweaking their products. Target-date retirement funds for young investors, managed by mutual-fund giant John Hancock, recently decreased exposure to stocks by 10 to 15 percent. Anecdotally, financial planners say young clients are keeping more cash on hand, and online banks such as ING Direct have rolled out savings accounts with slightly higher interest rates. "We're seeing people try to put bells and whistles on very conservative investments," says David Carter, chief investment officer at Lenox Advisors.

But in the long term, is it wise for 18- to 34-year-olds to avoid stocks, load up on bonds, and keep more cash in their bank accounts? Perhaps not, if they want to live comfortably in retirement. "You need the growth potential of stocks," says Christine Benz, director of personal finance for "Investors cannot expect the same returns from bonds and bond funds."

One idiosyncrasy remains this generation's attitude toward money. The Pew Research Center's findings show that 85 percent of adults under 30 feel optimistic about their financial future, compared with 45 percent of the 50-and-up crowd. Three quarters of young adults surveyed by the center say they feel confident they will have enough money to retire. So, while the twin busts may have diminished their appetite for risk now, there's reason to believe young adults' faith in the market will eventually return. Dollar-sign tattoo, anyone?