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Young investors urged to pounce on stock bargains

NEW YORK

The Great Recession has turned into the best of times for young investor Daniel Lee. Early this year, the 30-year-old salesman in Scottsdale, Ariz., shelved expensive meals and vacation plans and threw "every spare dollar" into the stock market. The value of his portfolio has more than tripled as the market has rallied since March. "This is like buying a swimsuit in the fall or a winter jacket in the spring," he says. "Get in while it's a good deal."

The plight of baby boomers and retirees, who lost a third or more of their stock market holdings, has been well-documented in the year after the financial meltdown.

But for people in their 20s and 30s who have a good job and feel it's secure, this is the best of times. Many were renters and had little or no money in the stock market. They didn't take a six-figure hit to the value of a home or 401(k) account. Now they're positioned to invest at prices no one would have believed during the boom years.

Home prices are down 30 percent, on average, and 50 percent or more in some markets. The Standard & Poor's 500 stock index is nearly 34 percent below its record high of October 2007.

Young people are benefiting in other ways, too. The Cash for Clunkers program allowed them to trade in beaten-up used cars and buy new ones at a discount.

"They're never going to see that again," says John Rogin, who owns a Buick dealership in Livonia, Mich.

The Consumer Price Index has recorded a rare drop over the past 12 months — 1.5 percent. And the decline for many goods and services has been much greater, allowing young people to put even more money into stocks and housing.

"This is a historic time," says George Jaramillo, 35, a business analyst in Atlanta, who recently purchased three homes, including two at foreclosure prices. "It's a great opportunity to make some great gains in the future."

Besides low prices, many have been spurred by low interest rates and a tax credit of up to $8,000 for first-time home buyers. First-timers, many ages 25 to 34, accounted for about 45 percent of home sales at the end of July, a figure that has risen steadily over the past two years, says Walter Molony, a spokesman with the National Association of Realtors.

Only 39 percent of adults younger than 35 are homeowners, compared with 80 percent of those older than 55, according to the U.S. Census Bureau. So the opportunity for those in their 20s and 30s to take advantage of the real estate crash is greater than for any other age group.

Young people also got a break with the stock market. Even with the surge since it hit a 12-year low on March 9, the S&P 500 index is nearly 30 percent lower than it was at the end of 1999. A recent study by money-management company T. Rowe Price highlights the benefits that young people can receive from investing in a down market.

The study compared how returns differ if someone starts investing during a weak decade for stocks that's followed by a strong one — and vice versa. Somebody who invested $500 a month in a fund replicating the S&P 500 starting in 1970 and continuing through the bull market of the 1980s would have ended 1989 with $589,707 — for an annualized rate of return of 11.5 percent.

The 1970s were characterized by high inflation and high unemployment and a flat market, setting the stage for the 1980s, when the S&P 500 tripled.

If the decades are reversed, and the strong years of the 1980s were followed by the 1970s bear market, the account would be valued at $358,972, even though the annual rate of return would still be 11.5 percent. The difference is that the investor in the first situation would have been buying more shares of stock each month during the bad years of the '70s.

"We need to be shouting from the rooftops that this is not the time to get out of the market if you're young," says Christine Fahlund, a senior financial planner with T. Rowe Price. "This is the time to be in the market."

For young people to take advantage of deals, however, they need to have a job — and cash. Neither is a given.

The unemployment rate for workers ages 20 to 24 jumped to 14.9 percent in September, up from 10.8 percent in the same month a year ago. Unemployment for those 25 to 34 is 10.6 percent, almost a point above the rate of 9.8 percent for people of all ages.

And the skyrocketing cost of undergraduate education means graduating seniors who borrowed money for tuition enter the work force with an average of $23,118 in student loan debt, according to the Department of Education. About 65 percent of students take out a loan to finance their education.

Plenty of people, though, are taking advantage of this recession's generation gap. One example is Ann Seiden, 28, who bought a home in Phoenix last November for 15 percent below the asking price.

Some people are casualties of the recession, she says, "and there are those who have kind of seized on the opportunities in it."

Young investors urged to pounce on stock bargains 10/10/09 [Last modified: Saturday, October 10, 2009 5:31am]

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