Baby boomer echoes investing todaySamantha Savory, a 25-year-old PR professional in South Florida, is terrified of the stock market -- and with good reason:
Her parents, who are in their 60s, lost more than $50,000 during the 2008 crash.

"Everything I saw happen in the recession over the past four years has freaked me out," she said. "Investing in the stock market is the same thing as going to a casino and gambling."

But still she knows she needs to earn income through more than just her job if she's going to be able pay off her hefty student loans and accrue some wealth.

"I need to make my money work for me," Savory said, "And I am coming to realize that I need to look at investments in the stock market in the long-run."

She's not alone.

The prevailing wisdom holds that many people now are shying away from untrustworthy stocks and stowing their money in savings accounts and low-risk investments instead.

Americans have been so spooked by the effects of the Great Recession, in fact, that according to a recent Gallup poll, in April, only 53% were invested in the stock market -- down from 65% in 2007 and 67% in 2002. And the belly flop of Facebook's much-hyped IPO has only served to depress confidence in the market.

But despite their apprehensions, all indications show that the children of the boomers are eager to jump into the market in a big way. That's in part because, even with the economy's lingering troubles, these investing neophytes haven't been burned personally by stocks. And that makes all the difference.

The Psychology of Personal Pain

Tobias Levkovich, a research analyst at Citigroup, sees younger people who have built up some assets getting ready to venture into stocks.

"The demographics of the baby boom “'echo”' should support a new cadre of investors," Levkovich wrote in a report published in December. A large cohort of people aged 35 to 39 will be entering their "savings years" in 2012, he notes. "This new group is unencumbered by the memory of suffering severe portfolio losses and thus may be new buyers of equities, especially if bond yields move up in 2013."

"It didn't happen to them -- it happened to their parents," Levkovich said of the 2008 market crash. "There's lots of work in behavioral losses, [showing] that people mourn their losses far more than people celebrate their gains. But if you didn't experience, you don't internalize it, and there isn't that persistent feeling: Sure, Dad lost money on stocks, but you still got the new bike for your birthday. "

There is recent precedent for this behavior: Baby boomers still invested in the market after the downturns of the 1970s and 1980s, because they hadn't directly felt the pain from them.

"In the 1980s and 1990s, growth came from two back-to-back recessions, supercharged with the PC boom and then the Internet boom," Levkovich said.

Dylan Evans, founder of Projection Point, a risk intelligence solutions firm, believes most people have a low aptitude for analyzing risk, which makes them more likely to enter the stock trading fray. In his book Risk Intelligence: How To Live With Uncertainty, Evans probes the psychological underpinnings of risk analysis, and his conclusions match Levkovich's: People don't fully consider the consequences of a decision if they haven't felt personally suffered from a bad result -- especially where money is concerned.

"My main emphasis -- and this might sound like a terrible Victorian thing to say -- is that people don't learn unless they feel pain," Evans said. "The difference between an expert [gambler] and a problem gambler is an asymmetry of feeling. A problem gambler gets an adrenaline rush and pleasure out of winning, but has little pain at losing. Experts absolutely hate losing. They strive to avoid it."

Bullish Feelings

Beyond the mere uptick in investing expected with the baby boom echo, now might very well be an auspicious time to invest -- doom-and-gloom talk be damned.

Signs are pointing up for the economy, Levkovich argues: The housing market is rebounding off a major low; U.S. manufacturing is on the rise, and is relatively more affordable now that Chinese wages have risen; an energy boom is under way in the U.S. as drilling bans in the Gulf of Mexico are being lifted, oil production in North Dakota is growing to 1 million barrels a day, and new natural gas wells are being drilled at a rapid clip; and the mobile Internet sector is growing, with projections that it will increase 26-fold by 2015, according to Cisco estimates.

With all these factors leading to more jobs and a more robust U.S. economy, people will have more means to turn to the stock market.

"We're on the cusp of another market regime change after a decade of poor performance," Levkovich said. "And we do tend to have decades. So unless you believe there's something wrong with the American entrepreneurial spirit, you will invest."

Over the next 12 to 18 months, Levkovich argues, there is a high possibility for a "raging bull" market -- with millennials buying equities in droves.

"The market is at a pretty low point," Evans said. "In the long run, stocks and shares are a pretty good bet relative to property. It could be seen as a rational strategy to invest in medium- to long-term pays. If you're in your mid 30s or late 20s, you've finished university and grad school and want to save for the future, it seems like a reasonable strategy."

"This Time Is Different"

Whether the outlook appears grim or not, people always return to the stock market.

In This Time Is Different: Eight Centuries of Financial Folly, co-authors Carmen M. Reinhart and Kenneth Rogoff argue that people try to convince themselves that whatever the current economic situation is, it has little in common with those that led to past crashes.

"Over very long cycles -- say 50 years -- there tends to be group amnesia about the private and social risks involved in massive debt-fueled booms, especially how they often end in tears," Rogoff told DailyFinance. "There is also amnesia about the aftermath of deep financial crises, which tends to be far more long and painful than the aftermath of 'normal' recessions."

"We do think 'this time is different,'" Evans said. "Every bubble starts with people determined not to do what happened last time -- avoid tech stocks, avoid the housing bubble, thinking, 'But this is a different bubble. This time is different.' The idea that somehow this time is different is crucial and necessary for the next bubble to get going. That might be what's happening behind these new investors."

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Times of stress, disstress, and pessimism are generally great times for buying. Downturns of this magnitude average 16 years. We are likely closer to the end of this terrible time. But it's the people who invest in times like these that are handsomely rewarded. The fatal flaw of investing is thinking today is tomorrow. Then things change as they always do and, in America, it has always been for the better. I wouldn''t want to bet differently this time. Once the crowd comes back it'll be too late and they cycle will repeat of everyone wanting to buy as in 1999 when everyone "knew" the markets could only go up. Like on the bottom they will be wrong.

July 01 2012 at 11:28 AM Report abuse rate up rate down Reply

I am in the Gen Y generation and heavily invested in the stock market. 401k, Roth and regular brokerage all have exposure. It is a great wealth generator if you do your research and have patience. Its not gambling if you follow companies that pay increasing dividends and sell when they hit new highs and then re-enter on a pull back. Just don't listen to Cramer since there isn't always a bull market. Its not that hard to save if you were raised to save and surround yourself with savers.

June 15 2012 at 4:25 PM Report abuse rate up rate down Reply

love it or hate it, the stock market has been the greatest generation of wealth in history

June 12 2012 at 5:25 AM Report abuse rate up rate down Reply

Ok so tell me : the credit union pays .4%, discover bank pays .7%, 10 year CD are 2.5% so where can you earn money in this environment. Must be diversified no matter what.

June 11 2012 at 6:03 PM Report abuse rate up rate down Reply

Great article. No particular genius here. History has shown this to work again and again. People just can't resist buying at the top, 1999-2000, and selling at the lows, 2003 and 2009. Just like life in general, the guys with discipline will win out every time. I'll grant that there are NO guarantees with stocks and they would lose if the world falls apart. Somehow I think stocks would be the least of my worries then. It's a calculated gamble that the world won't fall apart. If you sold everytime the guy is standing on the corner with his sign "the world is ending tomorrow" you won't have your shirt left eventually. As long as I've been investing these guys are there like clockwork(last 30 years).Just like the preachers who gather their blind disciples together preparing for the rapture and they fall for it.

June 08 2012 at 10:52 AM Report abuse rate up rate down Reply

Even young people will eventually have to deal with how High Frequency Traders harm and take advantage of public investors which is; In times of uncertainty, High Frequency Traders become High Frequency Short Sellers and pound equity markets down because there are no real buyers. This causes the stock market to become dysfunctional and perform like a commodity exchange.
The recent emergence and dominance of stock market computerized High Frequency Trading has eliminated traditional methods for evaluating equity investments. Quoted share prices have become no more than the reflection of the headlines of the day. High Frequency Trading must be addressed and dealt with if the stock market is going to remain an investment option for the public.
I believe High Frequency Trading abuses could be controlled by: (1) reinstating the up-tick rule, (2) charging a small transaction tax on every trade and (3) enforcing the rules against “naked” short selling that computer trading programs now ignore. Cliff Lindroth, San Diego, CA

June 07 2012 at 3:17 PM Report abuse rate up rate down Reply
Holli, Chaney

BoB Wrote:"If the Republicans win the election in November than look out. The stock market does far better with a Democrat in the White House and this has been proven to be so. If you had invested when Bill Clinton was in office you would have done very well. You then would have lost a large part of your gains while George Bush was President. Since Obama has been in office the market has taken off again. L ,,,,,,,,,,,,,,,,,,,,,,, FACT is BOB.. the stock market Does better under a REPUBLICAN HOUSE. The president doesn't matter. This rally didn't happen till the tea party took over. Of course Newt watched over the largest gain ever. Under Bush and the GOP we went from 7000 to 14,000 under the GOP and tax cuts..then pelosi came in.raised min wage...and we watched iit go from 14,000 down to 6000.

June 06 2012 at 7:45 AM Report abuse +1 rate up rate down Reply
1 reply to Holli, Chaney's comment
§. Savory

I can't take anyone serious who doesn't know the difference between "then" and "than" or the difference between a comma and an ellipsis.

PS - OBAMA for 2012!! woo-hooo

June 07 2012 at 10:01 AM Report abuse -1 rate up rate down Reply
Holli, Chaney

This isn't a downturn.. This is a meltdown WEre broke. Social dependents have busted the world. If they get back in its because they can buy MSFT as a penny stock.

June 06 2012 at 7:39 AM Report abuse +1 rate up rate down Reply

I am 37 years old and worked in retail sales during college and for a few years after college. Most of these retailers allow employees to take a stock opption whereby a couple of dollars are taken out of each paycheck and invested towards the companies stock. I only took that option with my last employer, Victoria's Secret ( parent company Limited Brands Inc). Boy do I wish I had taken the option with every employer because the extra has been nice.

June 06 2012 at 4:09 AM Report abuse rate up rate down Reply

Gen X and Y don't have any money to invest in the stock market because they've spent all their discrectionary cash on smart phones, tablets and other gadgets. The Boomer Gen owns the stock in the companies that maufacture theses devices and will continue to prosper.

June 05 2012 at 11:34 PM Report abuse rate up rate down Reply
1 reply to lazyh's comment

True, But dont forget boomer's are getting old and will die!... Who will get their wealth?.. And what will they do with it? These are the questions you need to answer for the longer view.

June 08 2012 at 12:34 PM Report abuse rate up rate down Reply