MoneyMagpie

Aug 20

Young people are not taking enough investment risk

Reading Time: 3 mins

According to research, it appears as though millennials, for the most part, haven’t focused a lot of attention on investing. Instead, they’re more interested in making safe decisions, including using savings accounts and hanging onto cold, hard cash. One analysis recently published by NerdWallet claims this decision has led to lost retirement savings somewhere around $3.3 million.

To come up with that figure, analysts assumed that millennials currently at the age of 25 would retire by 65. Part of that also assumed that both market conditions and future economics wouldn’t sway too far off course from the averages seen throughout history.

For this particular study, NerdWallet reviewed interest rates and market returns from the past four decades. That data included a base annual income of $40,458, which is what 25-year-olds earn today on average, and a 15 percent savings over the next 40 years. Again, they took into consideration that the market conditions would remain relatively the same.

The analysts also used three scenarios to look closely at hypothetical retirement savings by millennial investors. These include:

  1. Money deposited into a conventional savings account
  2. Fully investing in stocks
  3. Holding onto money, whether as hard cash or in the form of an interest-bearing account.

The findings were quite interesting. Primarily, analysts found that the way to making millions of dollars in investments links to the returns from the stock market. Compared to the other two scenarios, this one was by far the most aggressive with an accumulation of $4.57 million by the end of 40 years.

In looking at the savings account option, the money earned was far less impressive at only $1.27 million. As for the cash-only scenario, this was the worst choice of all. In fact, savings contributions were only slightly more than $500,000, meaning there was no real gain whatsoever.

 

Relying on Past Returns

Many analysts tell investors to anticipate a lower market return from now. Even so, over a long period, stocks are still the wisest investment option compared to a savings account and having cash on hand. Although there’s no viable way to predict how the market will behave in the future, analysist agree the closest remedy is to consider both historical returns and their volatility.

One thing that’s pretty certain, millennials who invest in stocks have more than a 99 percent chance of at least hanging onto their initial investment. While the same holds true for a savings account and cash, the difference is that with stocks, there’s a 95 percent chance of building on the initial investment to a tune of at least $1.67 million.

While there’s always a risk with the stock market, it’s usually worth taking, something that a lot of millennials don’t do. Unfortunately, multiple studies all show the same thing – millennials avoid the stock market. Another study conducted in 2015 by Blackrock showed that 46 percent of people in this age bracket feel the market option poses too many risks.

 

Why So Much Fear?

It’s important to understand that millennials remember what happened to the market from 2007 to 2009. Many of them witnessed their parents losing homes and businesses. However, it’s also essential to point out that as part of NerdWallet’s study, they included the Great Recession, meaning the stock market is still an excellent investment choice even in a downward market.

Millennials need to know that investing over a 30-year timeframe or longer will help them get through short periods of ups and downs so they can continue pursuing long-term goals until the day they retire. In fact, to make this a stronger point, even if millennials invested in the stock market for 10 years ending in 2016, this investment option still comes out way ahead of the other two investment scenarios.

Although no one wants to think that a recession could occur at the time they’re ready to retire, it could. However, in that worse-case scenario, millennials would only have to delay retirement for a short time, or they could go ahead and retire with a less robust portfolio. Even after 2008, and dating back to 1976, S&P 500 returns recovered 90 percent of their values within three years.

 

Taking Advantage of the Right Opportunity

There’s certainly nothing wrong with having a savings account or keeping cash around, but if millennials want a favorable retirement, they shouldn’t overlook the opportunity provided by stock market investing. As mentioned at the start, not grabbing onto this opportunity could have devastating results – $3.3 million worth.

 

Seeking Financial Advice

For the millennials out there, you can actually build your financial plan on your own using planning software such as WealthTrace. If you are not a do-it-yourself type, then do yourself a favor and meet with a financial advisor to discuss your options with the stock market. You’ll be glad you did.

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