Today’s “Generation Y“ individuals known as Millennials – those born from 1980 to 2000 – have been influenced negatively, in regards to investing, by the recent performance of the stock market. By recent performance, I refer here to the Great Recession that occurred at the end of 2008 and the beginning of 2009. This “Great Recession” resulted in the U.S. stock market, as evidenced by the S&P 500 Index, dropping 37% in 2008.
Watching and hearing about how investors “lost” considerable money in the stock market has left the Millennials with the incorrect understanding of the long-term performance of the stock markets. This younger generation has heard the warning to stay away from this pain and anguish that accompanies investing in the stock market.
If you have a family member or friends who are in these younger generations, and have recently entered the workforce, please pass this post along.
This young generation has come to a wrong conclusion about the stock market and the risk associated with these investments. They have not yet had the benefit of understanding that the stock market has a history of short-term declines. Sometimes severe declines like in 2008.
However, these declines have historically been short term and the stock market has rewarded patient investors. On average, investors that stayed the course earned over 10% per year total return in the long-term average as evidenced by the S&P 500, according to the Standard & Poor’s Index Services Group.
This post discusses the incredible market returns: Stocks for the Long Term
They will need to save money for what will likely be a longer life span than any generation has had before them. This longevity reality will require them to invest in the one asset class which has not only kept pace with the cost-of-living, but has actually grown faster than these cost-of-living increases – the stock market.
This generation, like all generations, needs to build their retirement accounts using a portfolio of diversified assets with the majority invested in the asset classes exposed in the domestic and international stock markets. Because they have had this jarring experience with the stock markets at a young age, they will likely be similar to the generation who are in their 70s and 80s now who lived through similar experiences when they were younger. This older generation, sometimes called the “Depression Babies”, avoided banks and investing after the 1929 stock market crash.
Depression Babies likely grew up in homes where the discussion was not about IF there would be another Great Depression to hit the United States, but WHEN it would occur and how would they survive it. Those scars run deep and are long lasting.
LESSON: The lesson that Millennials need to learn is that investors who were not prepared for the short term, at times severe market declines, lose money. The lost money is the result of being surprised and selling at the market bottom.
The correct market information needs to be conveyed to the Millennials as their skepticism runs deep. According to a Gallup poll taken in early April of 2014, just 27% of 18- to 29-year-olds reported owning stock shares outright or in funds, down from 33% before the recession in April 2008. Even affluent Millennials hold 52% of the money in cash, according to a UBS survey released in the first quarter 2014.
Understandably, this generation has decided to maintain principal by saving the money in what is likely a low-interest-bearing bank account. They have not had the life experience to understand that their purchasing power will decline rapidly over the years.
This advice is especially important for those people who are working for companies providing a 401(k) plan or other retirement account. The long-term benefit of having 40+ years before they have access to that “retirement” money, and before the money would be taxed, allows them to take an aggressive posture. In turn, this will then allow them to have a significant portion of this long-term money invested in a diversified stock portfolio. This long-term focus will require an understanding of short-term normal volatility in the stock market.
Encourage your family member or friend in this younger generation to spend the time necessary to understand the long-term benefit of investing in the stock market. A good place to start would be for them to sign up for the weekly newsletter that we publish or steer them to a couple of the posts on this blog site discussing the incredible benefit of the world stock markets.
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