Image: 401k © Tom Grill, Corbis

Putting the investment decisions in the hands of employees isn't working for Gen Y. When we read that 40% of Gen Y investors reportedly agree with the statement "I will never feel comfortable investing in the stock market," it sends a signal that they are making reactive investment decisions, and those are rarely good in the long run. It is certainly understandable, though, when you think about the timing of their first jobs and their first experiences with investing in their 401k plans.

Imagine seeing your very first statements showing less than what you put in, with your hard-earned money being sucked out to nowhere. It certainly wouldn't give you much confidence. Gen Y never had a chance to learn about investing before its members were jolted by a near 40% market drop in 2008. This drop frightened even the most seasoned investors, but it shook Gen Y investors to the core; 52% of them liquidated a portion of their portfolio in 2010 or 2011 due to market concerns.

They have 30 or 40 years before they need the money, but they are using reactive short-term strategies rather than implementing proactive long-term ones. Still, 71% of employees under 30 who have used our online financial-assessment tool report having a general knowledge of stocks, bonds and mutual funds. The problem may be how to apply this knowledge to their personal situations. Only 23% in this age group (the lowest of all the age groups) report they are confident that their investments are appropriately allocated. The reason they aren't confident is probably because their investments aren't properly allocated.

The average Gen Y investor has 30% of his or her assets in cash, the highest of all demographic groups, according to the latest MFS Investing Sentiment Survey results. This would be fine for a baby boomer or even a Gen X employee, but not for young employees starting out. They might feel better today with a high cash balance, but the risk is that they will feel worse down the road when their assets haven't even kept up with inflation. Moreover, they may be missing out on a once-in-a-lifetime opportunity to accumulate shares of growing companies at low share prices during a weak economy.

They haven't learned some time-tested investment strategies because they have been too busy playing defense. When you are being punched in the face, it is difficult to think about anything other than moving to safety. You just want to get away from your attacker and retreat to nurse your wounds. Because of their focus on defense, something is missing for the Gen Y investor -- a piece of the puzzle they either were never taught or aren't open to because they are too skeptical after their bad experiences.

Gen Y employees might be distrustful of the market and wary of corporations, but they are perfectly comfortable buying their products. The whole world is in love with cellphones, but to Gen Y they are an appendage, not a tool. They also buy iPads after waiting in line at the Apple store, subscribe to DirecTV, grocery-shop at Whole Foods, buy clothes at Abercrombie & Fitch and equip themselves to surf the Internet 24/7 with computers and connecting service. They drive, buy gas and eat fast food. In other words, they are heavy consumers of products but not investors in the companies that make them. Here lies the disconnect, and ultimately the investment opportunity.

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Following are some time-tested investment strategies that Gen Y (and the rest of us) can use:

Match your investment strategy to your goal

Simple but true. Every investment has a goal, such as providing future income in retirement, and the strategy needs to match that goal. The greatest investor of all time, Warren Buffett, once said, "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes." If you've done your research when you make your initial investment, volatility shouldn't be the only reason to abandon the strategy. Volatility comes with the territory when investing in stocks.

Investors who stuck with their investment strategy throughout the lowest months of the 2008-09 market downturn realized an average account-balance increase of 50% through June 30, 2011, according to a new study by Fidelity Investments. Investors who moved to cash during the downturn saw only a 2% increase over this same period.

Write down your goal for each investment, as well as your investment philosophy and strategy, and be sure to review those notes before making any changes.

Invest in equities for long-term growth

If they pay attention to what products and services their peers are buying, Gen Y investors could pick up some investment ideas. There are some great buys out there -- companies that are doing well in today's economy or poised to do well in a recovery but can be purchased today at rock-bottom prices. A self-directed account in a 401k is a great place to accumulate shares in individual stocks or mutual funds from the menu of funds provided by an employer.

Remember that Gen Y has a LOT of peers

Gen Y is a huge demographic -- larger than the baby boomers, three times the size of Gen X -- and makes up roughly 26% of the population. When the economy gets some positive traction, they will buy even more products. As they mature, their needs and their buying habits will change.

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The purchasing habits of 30- to 40-year-olds change as they settle down and have families. They'll need to furnish their homes once the old hand-me-down couch from college and the IKEA furniture don't cut it anymore. They will buy minivans or station wagons, diapers and bikes with training wheels. They will be a force to reckon with and will provide an investment opportunity for the savvy investor, just as the baby boomers helped fuel the growth of the stock market in the '90s.

Use the business cycle to your advantage

Embrace the bear. Gen Y investors are basing their investment strategy on the assumption that the market will always be down, which is obviously not the case. We just don't know when it will turn around. Economists are trying to predict when that will be, and they often contradict each other, further confusing the rest of us. If you have a very long time frame, as Gen Y does, you can use the current bear market to your advantage.

I remember talking with a young investor who called our financial help line concerned about a negative account balance. I suggested another way of looking at the statement. The account balance is meaningless when you have 30 years before you plan to sell. Instead of opening your statement and immediately looking at the account balance, look at the number of shares you are buying. Notice that when the market drops, you buy more shares.

When your goal is accumulating as many shares as possible, volatility becomes your friend. Investors with a long-term time frame who are investing regularly should be glad to see how many more shares they bought on the cheap. They can then hold on to them for sale after they retire.

Gen Y employees didn't have much of a chance to learn how to invest before they were thrown into the fire, and they have been reacting to it ever since. The good news is that it isn't too late, since time is on their side. The bad news is that they may not realize they are in the wrong investments until it is too late, and their ultraconservative allocation may not give them the long-term growth they need.