NY Times: Legacy of a Crisis: A Generation Shy of Risk

In Friday's NY Times, this article http://www.nytimes.com/2009/02/14/your-money/household-budgeting/14money.html?em does a nice job of explaining the potential generational change in risk tolerance we could see. While the article casually dismisses the possibility that we'll see the type of change in risk tolerance experienced by those in the great depression, excerpts of the article actually tell a different story. My interpretation: we are at the beginning of the change in risk tolerance, and articles like this advising changes in saving and investing behavior are providing the road map to ensure that the change takes hold. For example:

...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.

“I think the only thing younger people should be more risk-averse about is the leverage they take on,” said Jeffrey G. Cribbs, president of Chicago Wealth Management in Oak Park, Ill. In particular, he suggested they buy real estate and cars at levels below what they can actually afford.

Pulling leverage out of the system, as recommended above, will suck GDP out of our economy. It is what the Fed and Treasury are so concerned about. If you take the above comment seriously, the only way to stop the consumer from deleveraging is to provide guaranteed returns that offer better use of funds than paying down debt. That's a business proposition only the government would undertake (offer risk-free rates higher than what people pay on mortgages, credit cards, auto loans). Of course, the zero-percent-mortgage is a good start (an earlier post I predicted this as one potential outcome).

The article goes on to explain the importance of looking at your career as a component of your diversification strategy. That is, if your job is volatile, then maybe you should be more conservative in your investing. (I came to this very conclusion just before the market crashed last October - since most of my current income is highly market dependent, that I should move my investments into more secure instruments.) Likewise, if you are a fireman or a doctor, whose jobs are typical very secure with less volatile pay, then you can take risk in your portfolio. The article provides more, but here is a tidbit...

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 or 30 or 40 years of future earnings. It makes nearly everyone a millionaire on paper. 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.

This conclusion is interesting. They are basically saying, "forget everything you read in this article - if you are young, take foolish risk on the promise of many more bites at the apple." Who's really gonna buy that?

Joe