Millennials, contrary to public opinion, are prudishly conservative investors. If they ever hope to have enough for retirement, they’re going to need to be more tolerant of risk with their investments.
Millennials are in the age group 18-35. According to a recent study by UBS, Millennials kept between 40%-50% of their portfolio in cash, with a small percentage in bonds and just 35% in stocks.
The parallel many have is that their conservatism is more like the WWI generation who came of age during the Great Depression. Millennials, having come of age during the financial crisis, have a deep skepticism of the stock market and this seems to be behind their preference for cash. What many Millennials may not realize is that their largest asset class – cash and money markets while appearing safe – are earning negative returns after inflation. Listen to my podcast to learn more.
Millennials are the perfect age group to take advantage of the long term benefits of compounding returns the stock market can offer.
Over the past 140+ years, stocks on average have returned 6% annually after inflation. For example, a 25 year old, who has a 40 year time horizon, invests $5,000 each year until they get to age 65. For the investor that was very conservative, if they average 4% per year over the 40 years, they will accumulate about $475,000.
Another 25 year old, who ratchets up the amount of risk they are taking by investing more in stocks, averages 7% return per year. 3% more than the above investor. This 25 year old will end up with $1,000,000 at age 65. Double! Yes, the ride will be bumpy, but long term this Millennial will be rewarded for investing in stocks.
Date Posted: 05/18/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.