After the financial crisis of 2007 – 2009, too many young individuals have followed in the footsteps of their parents and grandparents by investing conservatively. According to a study done by the Transamerica Center for Retirement Studies, one in four individuals surveyed in their twenties had a majority of his/her portfolio invested in instruments such as money market funds and bonds. The risk-averse nature of the millennial population when it comes to investing is staggering, though not necessarily surprising given the magnitude of what many observers called a “once-in-a-generation” market decline. That said, it is important for young individuals to understand that embracing stocks is essential for adequate growth. Millennials are at the prime age where they should be taking more risk because they can afford to do so; the following are just some of the many reasons why this age group shouldn’t ignore equities:
One of the most valuable commodities in the world is time. When you are in your 20s and early 30s, time is on your side. If you ask today’s retirees what they could have done to improve their financial prospects in their 20s, they will likely tell you two things. The first would be to save money and the second, invest that money. The earlier you begin investing in equities, the more time your capital has to appreciate. Due to their young age, millennials can use the power of compounding to their advantage. They can also recover more easily from market pullbacks that often occur, while not worrying about financial responsibilities that come with having a family.
Since the recession, interest rates have been hovering near all-time lows. While this is good for borrowers, it is not very beneficial for savers. If the majority of your portfolio is currently invested in bonds and money market instruments, you will likely be relegated to nominal returns, especially with rates likely to move higher. Rising interest rates adversely impact bond prices, since the relationship between rates and prices is inversely proportional.
Like a silent thief at night, inflation can sneak up on a portfolio and slowly erode its value without an investor knowing. Even though inflation levels are currently low, data have indicated that this may not be the case for long. Because investing in stocks grants you ownership in a company, investing in these instruments helps to counteract the effects of inflation. As inflation pushes prices higher, companies react to these changes by raising prices on their own goods and services. All told, investing in stocks over other instruments, such as bonds, is a great way to hedge against inflation and make sure that your nest egg isn’t impacted by rising prices as much.
Considering the active role that millennials play in various areas of our fast paced world, the caution of today’s millennials, when it comes to investing in the stock market, is surprising. While the financial markets may be complicated, investing in a portfolio that emphasizes stocks can go a long way to building wealth for younger folks. Remaining underweight equities strips investors of the chance to invest even more in some of the best business ideas in the world, and even possibly finding the next Apple or Google. While equities are generally more volatile than bonds and cash instruments, they also offer more reward. It is never too late to start investing in equities and millennials, who have many years ahead of them and therefore the ability to recover from market downturns, should take initiative and consider boosting their participation in the stock market.
