The Danger in Being Too Risk Averse

While many Americans came out of the recession feeling like they were in better control of their finances, one age group has definitely been the most affected by the financial crisis of 2008.

Two surveys have found that millennials (people between the ages of 18 and 36) are more proactive about financial planning than their older counterparts and that their views of finances differ greatly from the majority.

In Northwestern Mutual’s 2014 Planning and Progress Study, millennial respondents were more financially disciplined than older generations. Only 14% are aiming high and pursuing investments that have a lot of growth. The study found that 30% favor “slow and steady” when it comes to financial planning, and another 30% would prefer to be more cautious, but feel they have a lot of catching up to do.

"While not quite putting money in the mattress, Gen Y definitely takes a more retro approach to how they handle their finances," Greg Oberland, Northwestern Mutual executive vice president, said in a statement. "I'm guessing they're making a lot of grandparents very proud."

A UBS Wealth Management report from January called millennials the most fiscally conservative generation since the Great Depression. A majority of millennials said the best advice they ever received was to save. Other generations typically say investing was the best advice. According to UBS, millennials are shaping up to be a generation of savers and remain skeptical about long-term investing and market chasing.

"Millennials seem to be permanently-scarred by the 2008 financial crisis," Emily Pachuta, head of Investor Insights at UBS Wealth Management Americas, said in a statement. "They have a Depression Era mindset largely because they experienced market volatility and job security issues very early in their careers, or watched their parents experience them, and it has had a significant impact on their attitudes and behaviors."

While many people likely see nothing wrong with being cautious, millennials might actually be too conservative when it comes to investing. In the book Investment Behavior, Joseph V. Rizzi wrote that young investors are endangering their future goals because they are “underinvesting in risky assets.”

Shirley Mueller, MD, wrote in a February column that these young investors will be so risk averse, their investment portfolios will not keep up with inflation.

“…stockholders, and especially those who are younger, might want to consider the risk they take by not taking any risk,” Mueller wrote.

According to the UBS study, a third of millennial respondents considered their risk tolerance as conservative or somewhat conservative, but their actual asset allocation suggests they are extremely conservative. While the average investor dedicates just 23% of his or her portfolio to cash, the average millennial has dedicated 52% to cash.

“Conventional wisdom has categorized millennials as ‘entitled’ and ‘lazy’ because they have more than their parents and grandparents did. But this study counters that hypothesis,” Pachuta said. “Having witnessed both the technology boom and the collapse of global markets, it has made millennials concerned, but resilient, and optimistic for the future. They’re conservative, similar to the WWII generation coming out of the Great Depression, not resting on their laurels, but rather working hard for their wealth and success, making sacrifices because they believe their goals are achievable.”