Much has been written about how young people, in reaction to a “lost decade” for U.S. equity returns, are turning away from stocks—following in the footsteps of those who experienced the crash of 1929 and the Great Depression.
In fact, this is only partly true.
According to a recent report by The Vanguard Group, Inc., those born between 1970 and 1979, “are now less likely to own any equities than in the past.” Citing data from the Investment Company Institute, Vanguard reports that only about 35% of today’s 32 to 41-year-olds own equities—down from close to 50% in 2001. In contrast, just over half of those born between 1960 and 1969 say they own equities today. In 2001, the figure for that age group was somewhere just north of 55%.
“The stagnation in equity ownership levels that characterizes all of the generations over the last ten years has impacted the youngest generation at a much earlier age,” says the report, written by John Ameriks, the head of Vanguard’s Investment Counseling and Research Group, and Stephen Utkus, director of the company’s Center for Retirement Research.
Still, when it comes to investments in retirement accounts, the story couldn’t be more different. When Vanguard looked at the average equity allocation of 20-year-old participants in 401(k) plans, it found their average equity allocation has actually risen—from 40.7% in 2003 to 84.7% in 2010. Moreover, the report adds: “While there is evidence that overall equity ownership among younger generations of U.S. investors has fallen in recent years, we find that within defined contribution plans, younger investors actually have higher equity allocations than previous cohorts had at the same age.”
Why are young investors embracing equities in 401(k) plans while shunning them elsewhere? Vanguard credits the growing use of automatic enrollment and target date funds—“both as defaults under automatic enrollment plans and” as standalone options.
Target date funds in particular have “significantly altered asset allocations among participants of all ages,” but “most notably among younger investors,” the report says.
When Vanguard looked at the asset allocations of investors ages 35 or younger at year-end 2010, it found that those in target date funds held 8.5 percentage points more in equities than those not in the funds. Among those ages 36 to 54, the gap was only slightly lower—7.9 percentage points.
For younger investors, the report adds, this is good news: After all, they “arguably have the greatest ability to assume equity market risk in pursuit of higher potential returns.”