The new young investor: Shunning stocks

NEW YORK (CNNMoney.com) -- When 18-year-old Robert White decided to jumpstart his retirement plan, he invested his life savings of $25,000 into an aggressive mutual fund.

Little did he know that just five years later, he would make a complete 180 and join the ranks of a new group of young investors who have become so risk averse by the wild market swings that they'd rather park their money in safety zones, like CDs or Treasurys.

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Ultra safe to risky: How 10 Gen Y-ers invest

Surveys show young investors are strikingly less eager to take on risk now than they were in 2001. Why some are holding and others are folding.

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Today, only 22% of investors under the age of 35 say they're willing to take on a substantial level of risk, according to the Investment Company Institute. Compare that with 2001, when that same group outpaced every other age bracket.

"We're coming off a series of financial crises that hit this young generation at points in their lives where external events shape strong opinions," said Christopher Geczy, adjunct associate professor of finance at University of Pennsylvania's Wharton School.

When White's fund began to slip with the broader market in 2008, he yanked his savings, now at $35,0000, and put the money into a short-term certificate of deposit with an annual return rate of 4%.

"It's almost embarrassing to talk to anyone about my portfolio because I know how stupid it is to normally keep my portfolio in cash," said White, now a 23-year-old graduate of Northern Arizona University.

While most investors have become more cautious during the decade, the biggest change has come from White's generation.

"Many of them have witnessed a decline in the wealth of their families and seen their parents delay retirement or even return to the workforce," said Geczy, who also serves as the academic director of Wharton's Wealth Management Initiative.

A recent Merrill Lynch survey of 1,000 affluent Americans, who boast more than $250,000 in investable assets, showed 56% of young investors consider themselves to be more conservative today than they were a year ago -- the highest percentage among all age groups.

"If you're in your 20s and are just starting to save for retirement, you've seen the market drop 55%, climb 88%, and drop again in a short span...If you're in your 30s and have been saving for the past decade, you've seen the stock market return essentially 0%," said Vanguard Chief Executive Bill McNabb, at a recent conference.

Members of Generation Y are also having a tougher time finding a job than their counterparts. The unemployment rate for workers under the age of 35 in August stood at more than 13%, compared to the nation's 9.6%.

White has mustered up the courage to return to the market but he is only dabbling in stocks with about 10% of his $60,000. That's a far cry from the 70% advisors typically recommend for young investors. The rest of White's cash is tucked away in a savings account.

He's hopeful he'll gain the confidence to boost his stock allocation to 75% this fall when he returns to his home of Maui and starts a job at a financial planning office.

"I'm just waiting to get the next piece of advice or news that will make me more comfortable about my decisions," said White.

Experts say White and his peers may be doing themselves a disservice by shunning stocks.

"The biggest risk for this generation is that they'll live too long. With medical breakthroughs, the reality is that many of them will live beyond 100," said Barry Nalebuff, a strategy professor at Yale's School of Management and co-author of Lifecycle Investing. "The only way they have enough assets to last them is to invest in stocks. If they don't, a lot of people will have to keep working way past when they want to because they won't have enough money saved up."

Nalebuff argues that young investors have decades of earnings to rake in, so they could plow 100% into a diverse portfolio of stocks and still offset the market's risks.

But that's little comfort to people like Neil Sowinski, 30, who remains unnerved by the market's swings. He pulled his money from stock market in January and dumped it into a Pimco bond fund, and advised his wife to do the same.

"We watched the tech bubble bust and then the housing bubble bust, and we lost money left and right but rode it all out," said Sowinski, an industrial mechanic in Racine, Wis. "After the market climbed back in 2009 and put us up about 15%, we pulled out because I felt that rally was just based on the government's stimulus and corporations cutting costs -- it wasn't sustainable."

He has $95,000 in bonds and is pleased with the 8% return so far, but he hopes to move back into the stock market for the long term.

Stocks have yielded an average of up to 7% each year after inflation over the last 200 years, while bonds have had a hard time squeezing out a 1% return rate, according to Wharton finance professor Jeremy Siegel.