There's nothing irrational about Millennials' aversion to stock-market risk

Rather than assuming Millennials are stupid for not throwing their cash at the stock market, take a moment to think through the financial events they’ve witnessed as young adults: a dot-com bubble that burst in 2000, a war-induced shock in 2001, a near market collapse that began in 2007 and lasted through 2009, and a decade over which bonds outperformed stocks. And when you do the math on stock market returns from the top in 2000 — when Millennials first started graduating from college — through last Friday, you find that the average annual return on the overall market since March of 2000 is a measly 1.5 percent.

Let that sink in for a moment. Over the past 14 years, the overall stock market returned only 1.5 percent each year, on average. One of the main tenets of modern financial theory is that higher assumed risk should result in higher expected returns, since a rational investor would demand greater returns in exchange for the assumption of more risk. If you could only use one word to describe the stock market from 2000 through 2010, it would probably be “volatile.” Maybe even “risky.”

And what did the average equity investor (gross of fees, mind you) get in return for the massive risk he or she assumed since the beginning of the 21st century? Roughly 1.5 percent a year over 14 years. From March of 2000 through mid-2013, an investor in a simple corporate bond index would have outperformed an individual who invested in an index fund that tracked the S&P 500.