5 Conservative Plays for Risk Averse Generation Y Investors

To a large extent we are a product of our environment. Our life experiences not only shape out behavior, but at its very core, they shape our thought process. The Great Depression forever changed a generation of people. It appears the “Great Recession” may be having a similar effect on another generation.

In a May 5th MSN Money article, Kathy Kristof explores what effect the financial crisis is having on Generation Y (those born between 1977 to 1994). It seems that this generation that lives life on the edge in most of their pursuits, are quite risk-averse when it comes to selecting their investments. That could be a decision that results in them coming up short in retirement. Here are some other interesting items from the article:

• 20- and 30-somethings put their retirement money in bank accounts, Treasurys or gold to simply “preserve” their savings.
• Only about half of all workers have access to a 401[k] plan, and only about 40% of the 20-somethings who are offered a 401[k] even participate
• if you had a diversified portfolio made up of 70% stocks and 30% bonds — about right for someone in their late 20s — you could reasonably expect to earn an average of 8.9% on your money over time
• Between 1929 and 1932, stocks lost roughly 85% of their value. But, in 1933, prices roared back, soaring nearly 54%.
• stocks gained an average of 18.2% annually during the 1990s (about double the historic average)

There are much better alternatives for the ultra-conservative Gen Y investors than money market accounts, Treasuries and CDs. A conservative strategy focusing on high quality, low risk dividend stocks should significantly out-perform the above investments, with very little incremental long-term risk. Based on my risk rating, here are five low risk companies for conservative investors to consider:

1. The Coca-Cola Company (KO) - Risk Rating: 1.25 - Yield: 3.82% (analysis)
2. Johnson & Johnson (JNJ) - Risk Rating: 1.25 - Yield: 3.62% (analysis)
3. The Clorox Company (CLX) - Risk Rating: 1.25 - Yield: 3.45% (analysis)
4. United Technologies Corporation (UTX) - Risk Rating: 1.00 - Yield: 2.97% (analysis)
5. SYSCO Corporation (SYY) - Risk Rating: 1.00 - Yield: 4.06 (analysis)

What the Gen Y investors haven’t realized is that the path they are following carries risk also. Ironically, they may have chosen the most dangerous investment of all.

Full Disclosure: Long KO, JNJ, CLX, UTX, SYY (my income holdings)

Comments

[PastTense:]

"if you had a diversified portfolio made up of 70% stocks and 30% bonds — about right for someone in their late 20s — you could reasonably expect to earn an average of 8.9% on your money over time"

Lots of Seeking Alpha readers and posters don't think this is reasonable assumption at all; that instead there it is strongly likely that these markets are going to perform very poorly over the next few decades--due to all the problems this country faces--and that very little effort is being made to deal with them. (Kicking the can down the road is the current preference)

May 13 02:53 AM

[G Spot1:]

I can say this speaks to me. I'm 32 and in my adult life we've gone from the dot com bubble to accounting scandals to the housing and credit bubble and Ponzi schemes. I, for one, don't trust the markets and feel like us individual investors are playing in a game that is waaay over our heads and is certainly not played for our benefit.

For me, though, I've decided to take control over more of my own investments. My 401ks/IRAs are in mutual funds but I've started doing my own homework for my other investments. Maybe this will crash and burn or maybe it will succeed, but it makes me feel a bit better for now to have some control. Interestingly, I've started employing just the strategy you are recommending and have looked at each of these stocks and similar ones. Investing in solid companies paying dividends seems to me like the only sure way a little guy like me can make money. I think this strategy would appeal to a lot of people in my generation.

I do agree with PastTense that an 8.9% return is too aggressive. With my financial planner, we've been using 7% expected return for pre-retirement investments, and I've been wondering if we should knock that down to 6, mostly because I don't think the overall stock market will repeat its history of gains over the next couple of decades. He said we are already being conservative in our estimates, but it is something I plan to revisit every year.

May 13 12:32 PM

[Dividend Gr...:]

As a Gen Y-er myself I could tell you I am not at all afraid by taking on an extra risk by investing a large chunk of my networth in mutual funds ( through retirement accounts) and individual stocks.
I do however know that stocks could remain flat or lower for extended periods of time. For these exact reasons I have focused my energies in indentifying strong dividend payers that would reward me with a rising divdend income stream over time. Of course I also keep a nice amount of laddered CDs as an emergency fund. Stocks are great, but even a small fixed income allocation could do wonders in bear markets.

May 13 12:41 PM

[Paul Price:]

Historically, dividends are responsible for about half of the stock market's total return. Yet by 2000, their slice of the pie plunged to just 10%. Meager dividends could significantly delay any full recovery.

May 13 07:57 PM

[Living4Divi...:]

"if you had a diversified portfolio made up of 70% stocks and 30% bonds — about right for someone in their late 20s — you could reasonably expect to earn an average of 8.9% on your money over time"

70/30 is too heavily weighted in bonds for an investor in his/her late 20s. but, I suppose it beats a 100% CD allocation.

May 14 06:00 AM