Wednesday, September 8, 2010

Millennials Shun Stocks...To Their Detriment

Yesterday, CNNMoney highlighted a recent report by the Investment Company Institute that concluded, "Today, only 22% of investors under the age of 35 say they're willing to take on a substantial level of risk" and therefore prefer investments like low-yielding certificates of deposit (CDs) and government bonds over stocks.

Nothing could be more disheartening to me as a Gen Y investor advocate because this means that Gen Y lacks fundamental investing knowledge that will result in long-term financial success. First and foremost, investing in stocks via a diversified basket of index funds should not be considered "substantially risky" - in fact, if millennials approach this correctly, they could erase almost all non-systemic risk inherent in their portfolios. Yes, all forms of investing carry some type of risk, but stock investing via index funds mitigates a large amount of that risk because the portfolios are well-diversified, low cost and eliminate the potential for individual investors to make bad individual stock picks.

Secondly, by parking their capital in CDs and government bonds, millennials are foregoing precious years of investment compounding that could be occurring and instead will see much of their interest gains erased by inflation should they stay in these securities for the long-term. Think about it this way. If you start out with $10,000 and the stock market returns 7% on average for the next 50 years, you will end up with $294,570 before expenses and taxes. If you instead invest that $10,000 in a combination of CDs and bonds and only earn 2% on average over the next 50 years (after inflation), you will end up with $26,916! The difference is stark!

Lastly, this story indicates to me that most respondents were completely scared out of stocks due to the recent financial crisis. Instead, just the opposite should have occurred: investors should have taken the opportunity to add to their existing index fund positions at a vastly lower entry point than what they initially bought in at.
Sure, there will be some bumps along the way as we saw beginning in late 2007. In the future, we will experience prolonged downturns, recessions and events that we may never have anticipated. However, what hasn't changed is the fact that the stock market remains the greatest wealth creator available to individual investors provided we utilize it appropriately and keep costs low.

Gen Y still lacks the basic investing knowledge required to establish a secure financial future. This article and the study by the Investment Company Institute that it highlights should spur Gen Y into action but helping them recognize their own mistakes. Now is the time to be investing for your future - via index funds and a well-diversified portfolio of dividend-paying stocks - not by parking a large amount of cash in a savings account.

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