The Young and the Riskless

Excerpted from Joe Light, Mary Pilon and Jessica Silver-Greenberg, Wall Street Journal

Risk-taking is for the young—except, it seems, when it comes to investing.

The 2008 market panic, last year's "flash crash" and the latest burst of volatility are proving to be more than many young investors can stomach. As a group, people in their 20s and early 30s are less comfortable taking risk than they were before the financial crisis, according to recent surveys—leading them to hunker down with safe assets at a time when many financial planners say they should be rebalancing into risky ones.

Investors who eschew risk at such a young age might be setting themselves up for disappointment. Without the compounding effects that come with investing in equities for a long time, stock-less investors might find it nearly impossible to accumulate a big enough nest egg to retire at all, let alone in their 60s.

"It's hard to build a lot of wealth without taking at least some risks in the markets," says Colorado Springs, Colo., financial planner Allan Roth.

The good news is that even the most traumatized young investors can take steps to ease back into the stock market and improve their long-term chances for success—while limiting the risks that made them so nervous about equities in the first place. The key is to take measured risks based on job security and other factors.

If young investors' fear persists, financial advisers say, the result could be leaner retirement funds later in life.

Advisers often urge young investors to put most of their retirement portfolios in stocks. Young people who take less risk will likely have to make up for it in other ways or suffer the consequences of a late or nonexistent retirement.

Although investors haven't seen much of a payoff from stocks over the last 10 years, over longer periods, equities have a much better track record. Over the last 20 years, large-capitalization stocks have returned more than 9% annually, and over the last 30 years, they have returned almost 11%.

Of course, no two investors are alike. There are a number of other important factors besides age to consider when choosing an allocation, from the person's career choices to their psychological resilience to losses.