Younger investors: A time to take risks?

When investor Joe Cohen checked his portfolio on-line last week, he thought there was a typo: Down 10 percent to 15 percent since the last time he checked — what happened?

Now Cohen, who considers himself an aggressive investor, is trying to figure out an investment strategy that might take him safely through the current market turbulence, perhaps a somewhat more defensive stance. Still, he's leaning toward equities because unlike many investors, Cohen's got plenty of time: He's only 27.

"When the market goes down 10 percent, it's a percentage, it's abstract," says Cohen, who led a real-estate investment company in Florida before starting as a student at Harvard Business School. But he said it's different when 10 percent of your money is gone: "That's more money than some of the jobs I'm looking at are offering."

When the stock market careens, investors approaching retirement fret about the declining value of their portfolios, which often become their primary source of income when they're no longer earning a salary. But despite having decades to work and watch their investments grow, investors in their 20s, 30s and 40s also sit up and wonder whether to adjust their financial holdings.

Young investors can afford to take risks with money they won't touch for years. Market declines can present opportunities, such as buying stock at cheaper prices — a move financial advisers are encouraging. But every investor has his own risk tolerance and not all young investors want to ramp up their exposure to equities and other volatile asset classes. Even investors who describe themselves as aggressive or don't plan to touch their investments for years can feel woozy when they lose money.

"Whether they're 35 or 55, people do not like to see their portfolios go down in general," says Peter Princi, a Boston financial adviser at Citigroup Inc.'s Smith Barney. He says he fielded a call this week from a 34-year-old client who "was as panicky as I've ever heard him."

Financial advisers can help investors of all ages prepare for and weather stormy markets. With younger clients who have limited investing experience, that can mean emphasizing the cyclical nature of markets and the inevitability of downturns. Explaining, sometimes repeatedly, the importance of diversification, asset allocation and rebalancing, even with experienced investors, is particularly important when financial markets fall.

In addition to helping young investors assume a level of risk in line with their goals and comfort levels, advisers can also nudge overly conservative investors further into the stock market by explaining the risks of not earning enough to meet their needs.

Dan Moisand, principal at wealth management firm Spraker, Fitzgerald, Tamayo & Moisand LLC in Melbourne, Fla., uses statistical data to show reluctant investors how equities provide a higher rate of return than other asset classes over time.

Smith Barney's Princi says volatile sectors, such as emerging markets or private equity, don't necessarily make sense for older investors, but could be great buys for the younger crowd, because they can generate a higher return over time.

Princi is advocating partial positions in equities or sectors like energy that may have been too pricey for a young investor to buy a few years ago.

Of course, not all younger clients have the same goals. If someone is hoping to buy real estate soon to take advantage of high inventory levels, she should keep her cash readily available, Princi says. Clients with young children might want to start a 529 college sav-ings plan with a lump sum, to maximize dollar cost averaging over time, he says.

Aside from counseling young investors to recognize opportunities in a turbulent mar-ket, financial advisers must also help clients sift through the information they gather from Web sites, television, newspapers, friends and colleagues.

"They're getting more information faster than other investors, but information doesn't equate to knowledge," says Drew Barlow, a Jenkintown, Pa.-based senior vice president with Wachovia Corp.'s Wachovia Securities. "At some point they're shutting (the information) out. They're looking for good advice."

Lisa Kent, vice president and wealth management adviser at Merrill Lynch & Co. in Princeton, N.J., says a couple in their late 30s decided during their portfolio review meeting in December to remain invested solely in equities, largely international. Kent and her team disagreed with this approach and, as they do with other clients, provided probability analyses and historical studies to show how certain asset allocations might perform over time. They also discussed expectations for continued market volatility and an economic slowdown.

The clients decided to stick with their all-equities strategy and, though the markets have since dropped, remain comfortable with their choice, Kent says.

"The decisions they made, they made with tons of data, input, analysis and discussion," Kent says. "These 30-somethings go in with their eyes wide open."

Members of Harvard Business School's investment club illustrate the various approaches young investors are taking in response to the recent market turmoil.

Aaron Gray, a 26-year-old former investment banker who is now in his first year at the business school, reallocated his assets last summer to companies he thought would do well in a downturn, and shorted financial stocks that he expected to have subprime expo-sure. Even though he's down some in January, he's "not worried about the short-term fluctuations in the market."

Others, like Mark Phanitsiri, 28, a second-year student at the school, are retreating slightly. Because he figured "things would probably get worse before they got better," he shifted about one-third of his portfolio out of equities and into inflation-protected bonds and the Japanese yen. He did that "just to sleep better at night."

Indeed, Kent says investors worried about stock market declines might have too large a portion of their portfolios in equities.

Fellow Harvard classmate Cohen is now working with his UBS AG financial adviser to determine his next move. He's thinking about investing in a distressed debt fund. And even though he may get "a little more defensive," he says he's not too focused on the short term.

Whether young investors work with a financial adviser or go it alone, they should re-member they have years to ride out market fluctuations and recover from mistakes.

Hans Olsen, chief investment officer for JPMorgan Chase & Co.'s JPMorgan Private Client Services says, "Time really is the investor's best friend."