Why Young Investors Are Shunning These Investments

It shouldn't come as a surprise to anyone with children that today's youth tend to eschew the things that defined their parents' generation. That can be a good thing, as younger Americans today seem to be much more concerned with work-life balance and making a difference in the world with their chosen profession than with just earning money. But there are some cases in which rejecting the example set by their parents can work against the Millennial generation.

Mutual fund aversion
Recent studies released in the post-recession years are indicating that younger folks are breaking with older generations in their level of comfort with investing. Specifically, Generation Y has a healthy distrust of mutual fund investing. A survey by the Investment Company Institute shows that while 74% of mutual fund shareholders ages 65 and older have favorable impressions of mutual fund companies, only 44% of investors under the age of 35 share those favorable views. That's consistent with other reports in recent years that show that younger investors remain hesitant about stock market investing.

It's easy to understand the skepticism among the younger set. After all, it is their cohort that has been most strongly affected by joblessness following the recent financial crisis. They've witnessed the stock market lose half of its value, and without the long-term perspective and experience of actual portfolio growth afforded by age, this age group hasn't reaped much of the benefits of investing. And given that actively managed funds in particular did so poorly in the last downturn and in the years immediately following, we've got a huge swath of a younger generation that doesn't see the value in using mutual funds to achieve their long-term financial goals.

Baby steps
But if younger investors want any chance to have a comfortable retirement, they are going to need to overcome their aversion to stock market investing in general and mutual funds more specifically. For folks just starting out in their working, saving, and investing careers, mutual funds are the best way to get diversified exposure to many different segments of the market with minimal levels of cash.

If you're a young investor who is among the 56% with a distrust of mutual fund companies, a good first step is to try out a broad-market exchange-traded fund. Since these funds simply track a common market index, you don't have to worry about excessive fees or unscrupulous fund companies trying to pull a fast one on you. Consider a fund such as Vanguard Total Stock Market ETF (NYSEMKT: VTI  ) or SPDR S&P 500 ETF (NYSEMKT: SPY  ) , which will only set you back 0.06% and 0.09%, respectively. And while many actively managed funds will fail to deliver, there are a number of solid options for investors in this age group, who should be able to handle a fair amount of risk.

A few good funds
One great aggressive growth mutual fund for younger types is Fidelity Capital Appreciation (FDCAX). Manager Fergus Shiel takes a rapid-fire trading approach to finding attractive growth-oriented names. In the portfolio, you'll find popular growth stocks like Apple, which has boosted portfolio performance as the stock has benefited from new product cycles for its iPhone and iPad devices. Shiel also likes retailer TJX Companies because of the company's excellent management and solid business plan, which is well-suited to today's retail environment in which customers demand more value for their money. Fidelity Capital Appreciation ranks in the top quartile of its peer group over the past five-year period, a clear indication that Shiel is on the right track with his eclectic investment approach.

Another option for aggressive investors who want to focus on the smaller end of the market capitalization spectrum is T. Rowe Price New Horizons (PRNHX). While the fund's manager has only been on board for about three years, he does have a more extensive track record managing other assets at T. Rowe Price. This fund seeks out fast-growing companies in the small-cap space and has landed in the top 1% of all small-growth funds in the past three years with a 19% annualized return. That's pretty impressive for manager Henry Ellenbogen, who includes stock picks like pharmacy technology provider Catamaran, favored for its attractive business model, ability to benefit from economies of scale, and overall product line efficiency. This fund can be volatile, but over the long run, returns have been excellent, making it a fine choice for young investors.

You don't have to profess your undying love for mutual funds, but if you want to be a successful long-term investor, you need to overcome your discomfort and involve funds in your portfolio -- especially if you're a young adult.

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Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 16, 2013, at 1:42 PM, Crosshair wrote:

    If you want a lower cost alternative to SPY, try Vanguard's VOO (Vanguard S&P 500 ETF). It has an expense ratio of 0.05%. This compares to an expense ratio of 0.095% for SPY (source: Bloomberg).

  • Report this Comment On January 16, 2013, at 2:55 PM, michaelkm88 wrote:

    Yes, unfortunately with the advent of the internet making it easy to compare things like "numbers" we can sniff out bull****, and actively managed fund reek of it. I hope more people either look at the numbers for index funds vs managed funds by cost and performance over 20 years.

  • Report this Comment On January 16, 2013, at 2:58 PM, DogGuyInvestor wrote:

    As a young investor (26 years old) this is my main problem with actively managed mutual funds...

    Say I put a $1,000 into my IRA today and assuming at the age of 26 my money will stay in that account for the next 40 years. Math would show if I simply invested it in a fund like VOO mentioned above and it returned an average of 8% over the next 40 years I would subsiquently end up with $21,325 (1,000*(1.0795^40)).

    Now, if I chose an actively managed fund that has an expense fee of 1.25 and it too returned 8% over the next 40 years (although 2/3 of actively manage funds don't even out perform the market) I would only end up with $13,636 (1000*(1.0675^40)), or $7,689 less than just leaving it in an ETF.

    So in other words those fees from the actively managed fund ate up 56% of my profits. Go back to that original $1,000 I invest in an actively managed fund, factor in an average of 3% inflation and that $13,636 is really worth $4,182 40 years later (13,636/(1.03^40))... I'll stick to my VOO and a few hand picked stocks.

  • Report this Comment On January 17, 2013, at 9:04 AM, ralphie4000 wrote:

    Yacktman funds (YACKX and YAFFX) have worked well for me so far, and have the added bonus of low initial investment price, low subsequent investment price

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