Are young investors too cautious?

November 22, 2010

USA/Young investors are cautious about their retirement investing and looking for all the help they can get via automation. That’s the most striking finding in the annual study by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) of more than 20 million 401(k) participants, released on November 22.

The study finds that recently-hired employees in their 20s held 41.5 percent of their retirement portfolios in target date or balanced funds in 2009. That compares with just 16.7 percent of 401(k) plan participants in all age ranges.

(The flocking to target date funds wasn’t limited to young investors–62 percent of newly-hired plan participants in their 60s are placing 90 percent or more of assets in target date funds. Just how many workers are getting hired in their 60s, we’ll leave for another day’s post.)

The new report follows earlier indicators of a new conservatism among young investors. A separate ICI survey of mutual fund investors showed that just 34 percent of retirement investors under age 35 were willing to take substantial or above average risk in their portfolios in 2009, down from 48 percent in 2005.

EBRI - ICI 401(k) participants studyYoung investors likely are taking the wrong lesson from the 2008 market crash. Indeed, today’s EBRI-ICI report shows that investors who suffered through the market meltdown have rebounded substantially since then. The average 401(k) account balance for participants over age 30 who have been in the study’s database since 2003  was $109,723 at yearend 2009–up 31.9 percent from 2008. Across the nine years studied, investors saw an average annual growth rate of 10.5 percent. The gains reflect employee and employer contributions and investment returns and loan activity, net of fees.

Financial experts usually advise young investors to sock away up to three-quarters of their retirement account contributions in stocks to keep up with inflation and accumulate a bigger nest egg for retirement. These  “new conservatives” will fall short of their retirement goal if they don’t get more aggressive with stocks.

Photo: A student reads on the campus of Columbia University in New York, October 5, 2009. REUTERS/Mike Segar

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[…] initial media coverage of the report: * Bloomberg/ Business Week * Reuters * Minneapolis Star-Tribune * Financial […]

Posted by Latest EBRI/ICI 401(k) Database Update — November 22, 2010 « ebriorg | Report as abusive

“Financial experts usually advise young investors to sock away up to three-quarters of their retirement account contributions in stocks to keep up with inflation and accumulate a bigger nest egg for retirement. These  ”new conservatives” will fall short of their retirement goal if they don’t get more aggressive with stocks.”

That conclusion assumes stocks perform as well as they have in the past 70 years if the stocks outcome were averaged and we exclude survivor bias but would not solve the problem of portfolio volatility approaching the target redemption date.

Posted by LeRod | Report as abusive

[…] not provide enough exposure to equities. You may not know it by their infatuation with tattoos, but Gen Y may be too conservative, Miller writes: The new report follows earlier indicators of a new conservatism among young investors. A separate […]

Posted by Retirement Savings Up, Some Worry Not Enough Stock Investing by Younger Workers « Portfolioist.com | Report as abusive

[…] | Personal finance | retirement | target date funds | young Are today’s 20- and 30-year-olds less willing to take investment risk following the latest bear market and recession than their age group was in earlier […]

Posted by Are investors under 40 too risk adverse? | Reuters Wealth | Report as abusive

[…] | Personal finance | retirement | target date funds | young Are today’s 20- and 30-year-olds less willing to take investment risk following the latest bear market and recession than their age group was in earlier […]

Posted by Are investors under 40 too risk averse? | Reuters Wealth | Report as abusive