Many young investors have been staying away from stocks, apparently spooked by a decade of poor returns and the recent - and painful - bear market. In fact, a survey last year by the Investment Company Institute found that Generation Y investors (born between 1977 and 2001) report lower risk tolerance than Generation X (born between 1965 and 1976).
But companies can make a difference when they enroll new employees automatically into employer-sponsored retirement plans and set target-date funds as the default investment. Vanguard-administered 401(k)s are more likely to have such features than they were in 2003. The result, according to a new Vanguard report, is that twentysomething participants now hold larger allocations in stocks than the age group before them.
The average equity allocation of the youngest participants (age 20) rose to 84.7% in 2010 from a low of 40.7% in 2003. The pattern held for participants younger than 30.
"The 'Lost Decade' and financial crisis did not lead to a 'Lost Generation' of investors in 401(k) and other defined contribution plans," says John Ameriks, head of Vanguard's investment counseling and research group and co-author of its new report.
Many companies have adopted automatic enrollment for new hires, who statistically tend to be young. The growth of target-date funds has also had a big effect on stock allocations. At the end of 2010, Vanguard plan participants age 35 and younger who owned target-date funds held, on average, 8.5 percentage points more in equities than those who owned only other kinds of funds.
"Younger participants are now more likely to be invested in a balanced portfolio offering - a better diversified mix of stock and bond investments - regardless of current market conditions," says Steve Utkus, director of the Vanguard Center for Retirement Research, co-author of the firm's new report with Ameriks.
Outside of target-date funds, the decision to own stocks tends to tie closely with market performance for new enrollees in 401(k)s. For example, in December 2008, a few months before the vicious bear market hit bottom, barely more than 80% of new plan participants chose to invest in stocks at all. By September 2010, amid the big market rebound, the number had increased to 92%.