Looking beyond the nation's stubbornly high jobless rate, the worst effects of the Great Recession may be slowly receding in the rearview mirror. But advisors are waking up to the fact that the shockingly steep drop in equities and Americans' retirement savings in 2008 has left a profound-and possibly permanent-psychological impact on younger investors.

There's no doubt the recent crisis in liquidity struck fear into the hearts of tens of millions of Americans in Generation X-those born around the tail end of the baby boom generation, about 1965-and Gen Y, which refers to people born after about 1985. What set the Great Recession apart from other steep corrections of the past few decades was not only its severity, but also its clear impact on younger Americans' sense of financial security, their faith in financial institutions and Wall Street, and their willingness to invest in equities for the long haul.

"It can directly and indirectly affect you," says Jay Park, a computer science and engineering student at the Georgia Institute of Technology who echoed the impact the recession has had on many of his generation. "Financial instability can completely ruin someone's outlook on life and turn someone into a dire pessimist."

Psychologists and sociologists typically find that most people's viewpoints on economics, finance, politics and society are shaped when they are entering adulthood in their impressionable late teens or early twenties. However, a seismic event like a world war or a near depression can also alter people's psyche when he is older.

Advisors may lump Generations X and Y into one group as tomorrow's clients, but their experience with the economy and financial markets differs dramatically. Generation Xers came of age financially during the explosion of equity prices in the 1990s. "Their first experience with investment risk was the tech wreck," says Steve Gresham, senior vice president, private client group at Fidelity Investments. "Many investors bought high-flying names thinking 'Things were supposed to be different this time.' "
Contrasts in outlook can be stark even among young adults fairly close in age. Kevin Gannon, a real estate consultant in Toms River, N.J., notes his 30-year-old son, who was in his late teens at the tail end of the tech bubble, believes that if you make enough wild bets, one will turn out a winner. His 22-year-old is much more cautious and conservative.

A lot of younger workers-particularly those on the leading edge of Gen X-have money to invest, says Bill Finnegan, director of global retail marketing for MFS Investment Management. But they're also navigating midlife financial challenges like big mortgages on houses that are under water and education costs for their own kids. The Great Recession didn't help.

Last year MFS conducted a survey on the investment attitudes of younger Americans that painted a portrait of a new generation of reluctant, gun-shy investors who are leery of investment advice, confused about their financial options and more conservative in their approach to savings and capital gains than were their baby boomer parents and older siblings. "Our results show confusion for Gen X/Y investors, with many considering themselves to be savers, not investors, and looking to their investments to generate income instead of capital appreciation for long-term goals," says Finnegan. Gen X individuals are now "facing those life decisions you're confronted with when you have kids and a home and a spouse and all the stuff that goes with it."

Nonetheless, investors under the age of 45 appear to have turned more optimistic in the last six months, as 42% of Gen X/Y folks in MFS' latest survey released in April indicated they increased 401(k) and/or IRA contributions and 36% said they were willing to assume more investment risk. Fully 55% of Gen X/Y investors reported that an effective portfolio should include international investments, more than either baby boomers or people over 65.

Both the X and Y generations also grapple with a savings and investment psychology tempered by the financial meltdown and other large-scale, macro-level threats. "The news gets amplified, but over the last ten years, you're looking at the dot-com/tech bubble burst at the beginning, you have the Great Recession at the end, this terrible liquidity crisis, and in the middle of it you have wars, terrorist attacks, tsunamis, hurricanes," Finnegan says. As for the recession, he adds, "I think the impact has been very severe. I don't think it'll be as long-lasting [as the Great Depression], but I do think it was probably as severe."

In its wake, he observes, the MFS survey found a generation scarred by the financial meltdown and other jarring events. Finnegan calls that shift "certainly understandable, if you look at these folks' formative years-between 18 and 28. If you look at the last ten years of the stock market and the nightly news, that can scare the bejeebers out of anybody."

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