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Will the meltdown alter young adults¡¦ willingness to take risks?

You did what you were supposed to do. College. Graduate school, maybe. Bought a home. Invested in mutual funds.

And now? You have student loan debt. Your degree has not shielded you from unemployment (or the fear of it). The house is worth 20 percent less than two years ago, and your retirement portfolio is down 40 percent from its peak.

So at this moment, can you blame people in their 20s and 30s for giving up altogether on risk of any sort? It¡¦s one of the bigger questions preoccupying those who think about money management all day. Are we in the process of minting a new generation of adults who are averse to taking chances, whether it¡¦s buying real estate or investing in stocks?

¡§We trained people that if you took risk and diversified and played by the rules that you¡¦d have a great life for yourself,¡¨ said Howard Simons of the bond specialist Bianco Research. ¡§But all of that can disappear in a hurry. And most of us can look in the mirror and say, ¡¥What did I do to cause this?¡¦ And nothing springs to mind.¡¨

I¡¦m not sure we can say for sure whether there has been some permanent change in attitudes toward risk. It¡¦s easy to overestimate the extent to which the world ¡X and our perception of it ¡X has changed in the middle of a crisis. But this one has not lasted long. And its duration does not come close to matching the period in the 1930s that left a permanent imprint on so many people¡¦s financial habits.

Even before the downturn, younger adults were not necessarily enthusiastic about riskier forms of investing, even though they are far from retirement. A joint study by the Investment Company Institute and the Securities Industry and Financial Markets Association said that just 45 percent of households headed by people under 40 held 51 percent or more of their portfolios in stocks, mutual funds and other, similar investments last spring. That is less than what households headed by those 40 to 64 owned. Fifty percent of them invested more than half their money in equities.

Data from Vanguard, however, suggests that its investors under 45 who use target-date mutual funds, which allocate assets among stocks and bonds for the investor, tend to have significantly more money in stocks than those who do not use these mutual funds. As more employers automatically sign up younger workers for 401(k) plans and use fairly aggressive target-date funds as a default investment, those employees¡¦ exposure to stocks will grow.

So perhaps a better question to ask is not whether people in the first half of their working lives are becoming more risk-averse, but whether they should be.

On Thursday night, Kevin Brosious, a financial planner in Allentown, Pennsylvania, polled the students in his financial management class at DeSales University on the percentage of their portfolios they would allocate to stocks right now. The majority would put less than half in stocks; among their reasons were fear of job loss, lack of accountability on Wall Street and economic fears amplified by the news media.

The problem with their approach, Brosious said, is that by investing conservatively, they are probably guaranteeing themselves a smaller return and a more meager standard of living in retirement.

Or, as Robert Siegmann, chief operating officer and senior adviser of the Financial Management Group in Cincinnati, wrote to me in an e-mail message: ¡§Why would you consider taking less risk NOW after most of the risk has already been paid for in the market over the past 12 months?¡¨

One sensible way to reduce overall risk is to pay down high-interest debt, like credit cards or private student loans. That, at least, offers a guaranteed return, since every extra dollar you pay now keeps you from having to pay more interest later. Also, the sooner you rid yourself of debt payments, the less you would need in your monthly budget if you lost your job.

So what kind of risk should you take on with the savings you have left over? To Moshe Milevsky, the author of Are You a Stock or a Bond?, risk should have less to do with the era in which you live and more to do with what you do for a living.

If you are a tenured professor, a teacher, a firefighter or other government employee, you have better job security than most other people. Your income stream is stable, like a bond. Certain service providers, like plumbers and doctors, have similar security.

Investment bankers and many technology and media workers, however, have more volatility in their career paths. A chart of their income might bounce around like one showing a stock¡¦s price.

As a tenured professor, Milevsky invests entirely in equities. Other people with bond-like characteristics who are far from retirement could take similar risks, and withstand 2008-level losses, because their incomes are fairly stable. Those who have more stock-like careers, however, probably ought to invest a bit more conservatively, in both their retirement accounts and in their primary residences.

For most young people, however, their biggest asset is not a 401(k) account or a home but the trajectory of their career and the value of 20, 30 or 40 years of future earnings. So whether you are taking on too much risk right now or not, all of that money will provide many more chances to fix any mistakes you have already made.
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