It’s a brand New Year and a good time to reassess and readjust long held attitudes. Money and how to handle it is usually one of the ponderable subjects. Especially if you’re part of the millennial generation that experienced the difficult times following the Great Recession of 2008/9.
Understandably, an aversion to investing is a reaction to the financial tsunami that may have wiped out family nest eggs and caused home foreclosures during early adulthood. And that’s a huge influence. But since those dark days, the Market has roared back. Those who could hold steady during those tumultuous times have actually made their money back. And those who were in a position to invest when the market was at its bottom? Well let’s just say we should all be a little awed by their foresight.
There are different investment options available that match each individual’s goals and timelines. For instance, invest more conservatively when trying to save for a down payment on a house in a few years versus investing for retirement 30 years down the road. And with increased diversification, investment returns can be maximized while taking smaller risks.
Experts say the more risk taken, the longer the investor should be willing to wait before it pays off. But investment objectives can be matched with life plan timelines. Many financial advisors invest clients in a diverse portfolio of 12 different index funds to provide maximum diversification at the lowest cost, and match their risks to their goals, timelines and risk tolerance.
Market Volatility is Normal
Hands down, everyone’s biggest fear in investing in the stock market is that it’s going to crash and life savings will be lost. While that scenario can happen, a crash is not as likely as you think. In fact, it’s uncommon. And even when markets crash, they inevitably come back. So investing for the long term makes this volatility much less of a concern.
Of course, Millennials are more on edge about the possibility of this particular setback than other generations, because they may have experienced the financial crisis firsthand caused by the late 2000’s global meltdown. As a result, many probably equate the stock market with extremely high risk, but that isn’t usually the case.
For example, a 2008-type crash occurs very infrequently; however, a 10% market correction happens on average once a year, so stock volatility is normal. But market volatility also creates opportunity to purchase good companies at a lower price. With active management strategies — the opposite of simply stashing one’s stock certificates in a safe deposit box — investment portfolios shouldn’t simply rise and fall with the market like they do with a buy and hold management style. It’s important to raise cash and get defensive at times but then be ready to deploy that cash once risk levels improve.
Investing Has Never Been Less Expensive
It’s a fallacy that only the rich can invest. All it takes is a little bit of disposable income. Many online brokers offer low-cost or even free trades, a prospect that was unimaginable just a few years ago. Hiring a financial adviser to navigate through the process is no longer a necessity either.
While the cost prospect of the latter is a deterrent for some Millennials, many investors still want the assistance of a human financial adviser to help figure out what to invest in and when to hold their hand during market corrections. It’s no longer necessary to use and pay for a human adviser. The technology is incredible, and the robo-adviser is on duty, 24 hours a day. If a human adviser is desirable, the ability to shop for exactly the right one, in terms of service, expertise, and cost, has never been easier using online research.
Investing Protects Money From Inflation
Think about this sobering fact for a second: Money earned and saved today will be worth less in the future if kept in a bank. The amount may not change, but over time, thanks to inflation, the value of money will go down if it’s left sitting in a bank account. Because inflation is approximately 2% and bank savings accounts generate less than inflation, there is negative real growth. Stocks are the best choice for healthy growth above inflation over time.
Self Reliance Is a Better Bet Than Relying on the Government
The simple reality of our current fiscal situation includes underfunded promises to Medicare, Medicaid, Social Security, and prescription drug benefits to the tune of $121 trillion and counting.
Millennials will, in many ways, be “stuck with the check” in later years for all the spending that’s already happened, which will mean a later retirement age for Social Security, higher tax rates and inflation in the future, and, likely, reduced benefits from these “entitlement programs.”
Considering this potential, Millennials owe it to themselves to prepare for a government that’s less able to provide for its citizens in retirement. Millennials should be contributing to 401Ks and taking advantage of matching contributions from employers — if they’re offered. But investing separately in the stock market also can fortify the ability to retire at a decent age, if not sooner.
Reinvested Growth Can Pay Off in the Long Run
Many stocks pay dividends, and reinvesting those dividends, as well as any capital gains will produce long-term benefits. For example, if a 25 year old invests $10,000, earning on average 6% annually, that investment will grow to just over $100,000 at age 65 — and that’s only with a $10,000 investment today. Consider that the S&P 500 has averaged 9.6% annual returns over the last 25 years, which includes the tech bubble and 2008 credit crisis, and the potential growth enjoyed might be even higher.
Time Is On Your Side
Of course, let’s not forget that Millennials are young and have several decades of saving and investing ahead. That’s a benefit that older investors don’t have which can be used to advantage. Millennials who are saving for retirement now have a timeline much greater than someone older. They have time to wait out blips in the stock market and can focus on the long term. They also won’t need to withdraw any income, thus allowing the investments to grow over many years.
The power of compounding can be astonishing. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Give your money a job and make it work for you!
Wall Street Journal
All books are available at amazon.com. Click on title to order.
by Erick Walk
Stock Market Investing for Beginners
by Tycho Press
The Neatest Little Guide to Stock Market Investing
by Jason Kelly
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