Don’t Be Afraid of Stocks – Info Computing
A couple of recent surveys have highlighted one easily-fixable way millennials are falling behind Gen Xers and Baby Boomers in their finances: Some are holding too much cash.
Vanguard analyzed 4 million investor households with IRA or taxable brokerage or mutual fund accounts, and found that while the median millennial household has around 90 percent of their portfolio in stocks, at least a quarter of Gen Y investors have “adopted conservative portfolios,” at a time when they should be taking on more risk. In fact, About 19 percent of millennial portfolios analyzed having nothing in stocks, compared to 14 percent of Gen Xers and 12 percent of Baby Boomers.
Why is that? You can guess. Per Vanguard, the 22 to 37 set still hasn’t gotten over the Great Recession. “Millennials who started investing at Vanguard after the global financial crisis are more than twice as likely to hold zero stocks as those who started investing before,” the report notes.
It’s true that in some cases these younger investors are saving for a house or another short-term goal, so it makes sense to keep some cash. But holding no stocks at all can hamper a young household’s ability to build wealth over the long term.
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It’s in line with the results of a recent Bankrate survey, which found that 30 percent of millennials prefer cash as their top long-term investment. Meanwhile, one-third of Gen Xers, 38 percent of Baby Boomers and 44 percent of the Silent Generation favor stocks.
Obviously there’s a big generational shift there—presumably, your portfolios will get more conservative as you age, not the other way around. But the Great Recession soured the oldest millennials on the unpredictability of the stock market, and for good reasons: Those born in the early 1980s graduated right into the recession, a fact that reports have indicated has harmed their finances for life. Add in student loan debt and high housing costs, and it’s easy to see why some might prefer to hold some cash.
But Bankrate illustrates why this is a potentially harmful attitude:
Millennials would lose out in a spectacular fashion if they acted on this bias. For the sake of simplicity, let’s assume you’re a 22-year-old worker planning to retire at 67 and you save 10 percent of your $50,000 salary in your 401(k).
If you invested in a money market fund yielding two percent, you’d end up with about $359,000 by the time you retire. If instead you contribute to a balanced fund of stocks and bonds which yielded eight percent annually (similar to Vanguard Wellington’s performance over the past 15 years), you’d have $1.9 million.
And note that bonds have historically lower returns than equities for long-term investors.
So, what to do? If you’re overly risk averse and have a retirement account, consider a target-date fund whose target year lines up with the year you plan to retire. You won’t have to worry about your allocations, and these funds are offered by the likes of Vanguard, Fidelity and other large investment firms. Outside of your retirement account, it’s, again, dependent on your goals (for example, if you plan to buy a house in a few years you’ll want to stash your money somewhere safer), but even the oldest millennials have decades to reap the benefits—and ride out the ups and downs—of the stock market. They shouldn’t be afraid of it.
Article Prepared by Ollala Corp