April 26, 2012
Americans are slowly starting to feel better about their finances. That’s evident from the latest retail sales figures released by the Census Bureau, which show that we’re spending more on cars, furniture, clothing, and electronics.
There’s one key area where Americans haven’t been buying, though: the stock market.
Despite record-low interest rates and a nearly four-month-long stock market rally, Americans remain reluctant to invest in stocks. About 76 percent of those polled for Bankrate’s Financial Security Index earlier this month said they were not any more likely to put their money in stocks than they were one year ago. Also, a mere 23 of Americans under 30 say they have become more inclined to invest in the stock market over the last year, compared to 18 percent of the general population.
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Those statistics are raising red flags among financial advisers and consumer finance experts. They say that though consumers’ inclination to shy away from risk is partly warranted after such a steep economic downturn, they worry that this recession could leave behind the kind of behavioral scars that cause today’s twenty-and-thirtysomethings to lack adequate retirement savings decades down the road.
“There are cohorts developing in younger and older generations today who are risk-averse largely as a product of this recession. That comes with a price,” says Jeanne Hogarth, a Manager of Consumer Financial Education and Research at the Federal Reserve Board. “I would just hope that people, particularly young people, wouldn’t it take to abandoning the stock market because historically it's been the best performing vehicle – better than savings accounts, better than bonds, better than cash.”
A substantial percentage of Generation X and Y workers already either contribute to an employer-sponsored retirement plan or Individual Retirement Account. Nearly half of Generation X-aged professionals devoted some of their income to those retirement vehicles in 2010, while 36 percent of Generation Y-aged workers did so, according to a December study by TD Ameritrade.
Yet consumers overall continue to divert their assets from stocks to bonds. Stock mutual funds posted outflows of $1.19 billion in February, while bond funds posted inflows of $34.13 billion, according to data from the Investment Company Institute. With interest rates at rock-bottom lows, those bond funds they’re buying could well turn out to be riskier than they think. As interest rates eventually start to rise, bond prices, which move in the opposite direction, will fall – meaning that, over the long term, those investments might not be as safe as buyers believe.
Today’s young professionals in particular can ill afford to ignore stocks because they have decades before turning to that money, longer life expectancies mean they will need it to last longer, and may have to entirely self-fund retirement since it’s unclear what kind of support Medicare and Social Security will provide them, said Greg McBride , a senior financial analyst at Bankrate.
“We are seeing there are a lot of those under 30 who are driving fast, and texting while driving in the rain, and yet they are afraid to squirrel their 401(k) money into the stock market because they think that’s risky,” McBride said. Instead, relatively small amounts of that money are going into liquid accounts like savings accounts and money market deposit accounts, while much of it is being spent outright, he said. “This leads to the potential that a lot of young people are going to fall well short of the bogey they need for a comfortable retirement.”
Not all personal finance experts view young workers’ financial conservatism as cause for alarm. This could be an early sign that young people are and will continue to build the savings cushions they need to establish before they invest, said Beth Kobliner, a personal finance commentator and author of “Get a Financial Life: Personal Finance in Your Twenties and Thirties.” “If they’re not putting it into the stock market, the hope is that they're putting the money into savings accounts that may pay half a percent but at least that they know will be there,” she said at a personal finance forum in Washington earlier this week. “I think they’re showing prudence in terms of building a savings cushion.”
That hope isn’t turning into reality yet. In fact, consumers overall are saving less than they did in the immediate wake of the recession. Americans’ average personal saving as a percentage of disposable income was 3.7 percent in February according to the Bureau of Economic Analysis, compared to 5.3 percent in 2010.
David Joy, chief market strategist at Ameriprise Financial, says it’s going to be particularly challenging to convert today’s young workers into active savers and investors. “You can’t underestimate the impact on trust this financial crisis has had with markets, governments, and banks and people coming of age during it,” he said. “But they either have an appropriate level of risk in their portfolio or push themselves to save enough to justify that conservative stance—and neither will happen magically or accidentally.”