Young Investors Scared of Risk

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A new study reveals young Americans are overly cautious toward investing. Could their attitudes be undermining their financial future?

When they’re not tweeting, texting or downloading the latest Lady Gaga tune for their iPods, young Americans are actually seriously focused on money. While that’s a good thing, their investment habits are overly cautious, according to a new study, and that could undermine their financial futures.

The data comes from Bank of America’s Merrill Lynch Affluent Insights Quarterly, in a regular survey that tracks the investment habits of Americans.

It’s a comprehensive survey, and worth examining for a broader look at Americans’ investment habits.

According to the Merrill Lynch survey, about half of all respondents classify themselves as “conservative” investors with a “low tolerance” for risk. In fact, the younger the investor, the more prudent his or her investment outlook. The study points to an interesting conclusion: Young adults — whom the Merrill study defines as Americans age 18-34 — have a lower tolerance for risk than those famously spendthrift Baby Boomers between 51 and 64.

You can’t blame their cautious investing habits on what some are calling the “dead-end kids” — a demographic obviously hurting from the economic slowdown. According to the U.S. Labor Department, the most recent numbers on unemployment for Americans aged 16 to 24 is a staggering 46.6%.

While the trend toward caution is understandable, it’s also unhealthy and worrisome, according to the study.

"It is understandable that younger investors who have experienced or witnessed the market swings during the past decade and the impact they may have had on their family would be skeptical about more moderate or aggressive investment strategies," said Sallie Krawcheck, president of Bank of America Global Wealth and Investment Management. "However, not investing at all or keeping to a more conservative approach at a younger age can be detrimental to asset growth sought over longer time horizons.”

Could younger Americans be shaping their financial future with ignorance? That’s a harsh assessment, but it’s one documented by Professor Annamarie Lusardi of Dartmouth College. In a study of young Americans and basic economics, the author concludes that only 27% of young Americans could answer three basic economics questions correctly.

If that’s true, America’s millennials will need to step up their financial game — and fully expect that their Baby Boomer elders who are running the country right now can pitch in with bigger and better job opportunities.

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