As registered investment advisors, we have to admit that millennials are making a big mistake.
Recent studies reveal that many millennials, although very good savers, are generally investing as conservatively as retirees. In one study of investment preferences, those age 22 to 32 said that they chose to put 75% of their retirement savings in cash and bonds and only 25% in equities. In another study, 74% of those under the age of 35 stated that they were unwilling to take above-average or substantial risk with their investments — another indication of this group’s tendency to be risk-averse and potentially overlook equities.
The iInvest® Team, our team of retirement planning and investment planning specialists, state that this is the opposite of what millennials should be doing, as they are missing out on the most powerful investing phenomena there currently is. It is available to everyone but oftentimes not taken advantage of. It’s a wealth accumulation strategy that many retirees and pre-retirees wish they had taken advantage of sooner
What are we talking about? Time invested.
In our March 23rd iInvest® Educational: Time Value of Money, we stress how important time invested is, compared to how much is invested. This is due to the power of compound interest and dollar cost averaging.
The Power of Compound Interest
In the chart comparison below of Susan, Bill and Chris clearly shows how time invested far outweighs how much you invest.
In this scenario, Susan invests $5000 annually from age 25-35 then stops completely at the age of 35 and invests nothing for the next 20 years, until retiring at age 65. Bill invests $5000 annually from age 35-65, 30 years of investing compared to Susan’s 10 years of investing and has $50k less than Susan at age 65.
Chris became a millionaire in his 60’s, just by saving $5k/year, less than what it takes to max out a small Roth IRA, just by starting early and sticking with it, age 25-65.
Imagine what you would have if you had started at age 21, or even age 18?
Why are Millennials not investing?
“The stock market is too risky”
Nearly 80% of millennials are not invested in the stock market, according to a new Harris poll. At iInvest®, we believe one of the reasons Millennials don’t invest like they should is fear of financial loss.
After all, most Millennial’s parents are Baby Boomers, who had to suffer a Secular Bear Market from 2000-2013, either just before, just after, or during their retirement years, not a fun time, and it happened during their most crucial investing years.
Therefore, millennials probably grew up hearing their parents complain about investing and the stock market itself. Below is a graph of secular bear markets of the last 100+ years:
Secular Bear Markets seem to happen with every generation, but the fear of one happening in the future is not a good reason to be on the side lines. After all, Dollar Cost Averaging itself helps alleviate volatility, especially in the early years of investing.
What is Dollar-Cost Averaging (DCA)?
Dollar-cost averaging (DCA) is an investment technique of buying a fixed dollar amount of an investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high.
Contributing weekly/monthly, Dollar Cost Averaging helps relieve portfolio volatility especially in the early years.
An investor typically becomes more conservative over time, as retirement gets closer and significant savings are accumulated. This is when Dollar Cost Averaging has less of an impact.
What Is Another Reason Millennials Are Not Investing?
“I don’t have enough money to invest”
Another reason Millennials don’t invest, is that 41% (according to one study) feel they don’t have enough money to invest in the stock market currently, and believe it takes a lot to start. In fact, according to the same study. 70% of millennials think they need at least $100 to start investing in the stock market, while 38% think they need at least $1,000.
This is just not true. For instance, iInvest® has no investment minimum, and using fractional shares an investor can have a diversified portfolio with not much $$.
If you have any questions about beginning your investment strategy, we suggest that you contact us and speak to a registered investment advisor to discuss investing towards your retirement.
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