Don’t Be Afraid of Stocks
Several recent polls have identified one easily fixable way that millennials and baby boomers are lagging behind Gen X and baby boomers in their finances: some of them have too much money.
Vanguard analyzed 4 million investor families with IRAs or tax-deductible brokerage or mutual funds and found that while, on average, a millennial household has about 90 percent of their portfolio in stocks, at least a quarter of Gen Y investors “accepted conservative portfolios ”, a time when they should take more risk. In fact, about 19 percent of millennial portfolios analyzed had nothing in stocks, compared with 14 percent of Gen X and 12 percent of Baby Boomers.
Why? You can guess. According to Vanguard, the 22 to 37 set still hasn’t overcome the Great Recession. “Millennials who started investing in Vanguard after the global financial crisis are more than twice as likely to have zero stocks as those who started investing earlier,” the report said.
It is true that in some cases these young investors are saving money for a house or other short-term goal , so it makes sense to save some money. But the complete absence of stocks can prevent a young family from building wealth in the long run.
This is in line with a recent study by Bankrate , which found that 30 percent of millennials prefer cash as their main long-term investment. Meanwhile, a third of Gen X, 38 percent of the baby boomers, and 44 percent of the silent generation prefer stocks.
Obviously, there is a big generational change going on here – it seems that your portfolios will become more conservative as you age, rather than the other way around. But the Great Recession upset the oldest millennials with the unpredictability of the stock market, and for good reason: Those born in the early 1980s went straight into a recession, a fact reports have shown has wreaked havoc on their finances for life. Add to that student loan debt and the high cost of housing, and it’s easy to see why some might prefer to have a little cash.
But Bankrate shows why this is a potentially harmful attitude:
Millennials will fail if they act out of this bias. For simplicity, let’s say you are a 22-year-old worker planning to retire at 67, and you are saving 10 percent of your $ 50,000 salary at 401 (k).
If you have invested in a money market fund, bringing two percent, then by the time of retirement from you will be around 359,000 dollars . If you instead contribute to a balanced fund of stocks and bonds that yields eight percent per annum (similar to Vanguard Wellington’s performance over the past 15 years), you have $ 1.9 million.
And note that bonds have historically had lower returns than stocks for long-term investors.
So what to do? If you are risk-averse and have a retirement account, consider a fund with a target date that has a target year that coincides with the year you plan to retire. You don’t have to worry about your allocations, and these funds are offered by companies such as Vanguard, Fidelity and other large investment firms. Outside of your retirement account, again, it depends on your goals (for example, if you plan to buy a house in a few years, you might want to hide your money in a safer place), but even the oldest millennials have decades to reap the benefits. benefit – and experience the ups and downs – of the stock market. They shouldn’t be afraid of it.