Painless Investing: Why Gen X and Gen Y Are About to Dive Into Stocks

Baby boomer echoes investing today
Baby boomer echoes investing today

Samantha Savory, a 25-year-old PR professional in South Florida, is terrified of the stock market -- and with good reason:
Her parents, who are in their 60s, lost more than $50,000 during the 2008 crash.

"Everything I saw happen in the recession over the past four years has freaked me out," she said. "Investing in the stock market is the same thing as going to a casino and gambling."

But still she knows she needs to earn income through more than just her job if she's going to be able pay off her hefty student loans and accrue some wealth.

"I need to make my money work for me," Savory said, "And I am coming to realize that I need to look at investments in the stock market in the long-run."

She's not alone.

The prevailing wisdom holds that many people now are shying away from untrustworthy stocks and stowing their money in savings accounts and low-risk investments instead.

Americans have been so spooked by the effects of the Great Recession, in fact, that according to a recent Gallup poll, in April, only 53% were invested in the stock market -- down from 65% in 2007 and 67% in 2002. And the belly flop of Facebook's much-hyped IPO has only served to depress confidence in the market.

But despite their apprehensions, all indications show that the children of the boomers are eager to jump into the market in a big way. That's in part because, even with the economy's lingering troubles, these investing neophytes haven't been burned personally by stocks. And that makes all the difference.

The Psychology of Personal Pain

Tobias Levkovich, a research analyst at Citigroup, sees younger people who have built up some assets getting ready to venture into stocks.

"The demographics of the baby boom “'echo”' should support a new cadre of investors," Levkovich wrote in a report published in December. A large cohort of people aged 35 to 39 will be entering their "savings years" in 2012, he notes. "This new group is unencumbered by the memory of suffering severe portfolio losses and thus may be new buyers of equities, especially if bond yields move up in 2013."

"It didn't happen to them -- it happened to their parents," Levkovich said of the 2008 market crash. "There's lots of work in behavioral losses, [showing] that people mourn their losses far more than people celebrate their gains. But if you didn't experience, you don't internalize it, and there isn't that persistent feeling: Sure, Dad lost money on stocks, but you still got the new bike for your birthday. "

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There is recent precedent for this behavior: Baby boomers still invested in the market after the downturns of the 1970s and 1980s, because they hadn't directly felt the pain from them.

"In the 1980s and 1990s, growth came from two back-to-back recessions, supercharged with the PC boom and then the Internet boom," Levkovich said.

Dylan Evans, founder of Projection Point, a risk intelligence solutions firm, believes most people have a low aptitude for analyzing risk, which makes them more likely to enter the stock trading fray. In his book Risk Intelligence: How To Live With Uncertainty, Evans probes the psychological underpinnings of risk analysis, and his conclusions match Levkovich's: People don't fully consider the consequences of a decision if they haven't felt personally suffered from a bad result -- especially where money is concerned.

"My main emphasis -- and this might sound like a terrible Victorian thing to say -- is that people don't learn unless they feel pain," Evans said. "The difference between an expert [gambler] and a problem gambler is an asymmetry of feeling. A problem gambler gets an adrenaline rush and pleasure out of winning, but has little pain at losing. Experts absolutely hate losing. They strive to avoid it."

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Bullish Feelings

Beyond the mere uptick in investing expected with the baby boom echo, now might very well be an auspicious time to invest -- doom-and-gloom talk be damned.

Signs are pointing up for the economy, Levkovich argues: The housing market is rebounding off a major low; U.S. manufacturing is on the rise, and is relatively more affordable now that Chinese wages have risen; an energy boom is under way in the U.S. as drilling bans in the Gulf of Mexico are being lifted, oil production in North Dakota is growing to 1 million barrels a day, and new natural gas wells are being drilled at a rapid clip; and the mobile Internet sector is growing, with projections that it will increase 26-fold by 2015, according to Cisco estimates.

With all these factors leading to more jobs and a more robust U.S. economy, people will have more means to turn to the stock market.

"We're on the cusp of another market regime change after a decade of poor performance," Levkovich said. "And we do tend to have decades. So unless you believe there's something wrong with the American entrepreneurial spirit, you will invest."

Over the next 12 to 18 months, Levkovich argues, there is a high possibility for a "raging bull" market -- with millennials buying equities in droves.

"The market is at a pretty low point," Evans said. "In the long run, stocks and shares are a pretty good bet relative to property. It could be seen as a rational strategy to invest in medium- to long-term pays. If you're in your mid 30s or late 20s, you've finished university and grad school and want to save for the future, it seems like a reasonable strategy."


"This Time Is Different"

Whether the outlook appears grim or not, people always return to the stock market.

In This Time Is Different: Eight Centuries of Financial Folly, co-authors Carmen M. Reinhart and Kenneth Rogoff argue that people try to convince themselves that whatever the current economic situation is, it has little in common with those that led to past crashes.

"Over very long cycles -- say 50 years -- there tends to be group amnesia about the private and social risks involved in massive debt-fueled booms, especially how they often end in tears," Rogoff told DailyFinance. "There is also amnesia about the aftermath of deep financial crises, which tends to be far more long and painful than the aftermath of 'normal' recessions."

"We do think 'this time is different,'" Evans said. "Every bubble starts with people determined not to do what happened last time -- avoid tech stocks, avoid the housing bubble, thinking, 'But this is a different bubble. This time is different.' The idea that somehow this time is different is crucial and necessary for the next bubble to get going. That might be what's happening behind these new investors."