Millennials, once thought to have abandoned equities after the crisis of 2008, are increasingly willing to take on investment risk

By Sameepa Shetty

FORTUNE--The 2008 financial crisis drove many U.S. investors, especially young ones, out of the stock market. Investors between the ages of 20 and 29 slashed exposure to stock funds in their retirement accounts by nearly half from 2007 to 2012, according to data from mutual fund giant Fidelity Investments.

This prompted surveys and newspaper headlines warning that so-called millennials would abandon stock investing, just as millions did a few generations earlier after the crash of 1929. "We're at risk of losing an entire generation of investors," John Thiel, who heads the U.S. wealth management and private banking and investment group at Merrill Lynch Global Wealth management, told an investor conference in the spring of 2012.

But the fear of "the young and the riskless" hasn't materialized. A survey of more than 4,000 households, released by the Investment Company Institute in its 2013 Fact Book, found that 26% of households below the age of 35 were again willing to take on "substantial investment risk," compared with a low of 18% who said they were willing in 2011. Retail brokerage companies such as Charles Schwab (SCHW) say they've been seeing young investors return to equities over the past year.

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Rising stock markets are driving this increased risk appetite among the young, says Russ Koesterich, Global Chief Investment Strategist at BlackRock. "Market momentum influences retail investor behavior," says Koesterich, adding that it is typical behavior for people to be more willing to take on investment risk when the potential for reward seems high.

But with stock markets growing more volatile by the day, is now the best time to embrace risk?

For young investors, as for anybody, Koesterich warns that trying to time the markets is a fool's game. "If your investment horizon is anywhere over three-to-five years, short-term market fluctuations do not matter," he says.

It's tough for young investors to keep away from stocks and still fulfill their long-term financial goals, says Koesterich, who is also author of the portfolio management book, The Ten Trillion Dollar Gamble. Money managers agree that it's very difficult, if not impossible, to meet those goals by just staying in cash and bonds. (In spite of the market rally, stock-market valuations remain reasonable, Koesterich contends.)

"Seeing the strength of both the housing and the stock markets may be goading young investors to take on more investment risk," says David McSpadden, a senior vice president of Global Advisory Services at Franklin Templeton Investments. Despite that, McSpadden is optimistic about young investors returning to stocks.

"The willingness to take on more investment risk, among young investors, is a healthy sign that people are more confident in the economy," says McSpadden.