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What Millennials Get Wrong About Investing

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Homer, Alaska, United States of America

Around the time Millennials were in high school, the stock market endured the tech crash. Then, as many Millennials entered the workforce, we saw a second financial crisis and then the Great Recession that followed. As a result, Millennials are, understandably anxious about investing in the stock market. Unfortunately, that means that many Millennials may not achieve the long-term investment results that they deserve.

Various studies have highlighted Millennials’ reluctance to take investment risk. A Wells Fargo study found that more than half of Millennials say that they will “never” be comfortable investing in the stock market. A Bankrate study found a quarter of Millennials view cash as the best long-term investment. A Merrill Edge study found 85% like to “play it safe” with their investments. The results from these different surveys are consistent. Jaded by two major financial panics early in their lifetimes, Millennials are reluctant to embrace the stock market. Yet, this comes during a period when the U.S. market has more than tripled off the lows from the last recession, now a decade ago.

The Challenges Of Personal Experience

Millennials are making one big mistake. Stocks have historically been a fantastic asset class to invest in for the long-term, this is true even when big market crashes such as 2000 and 2008 are included. Millennials are drawing too much on their own bad experiences of the markets, and not the broader picture from investment history. Yes, the markets fell sharply in 2000, but the markets then rose 50% off the lows. Of course, the markets fell once again in 2008, but most diversified stock investors for much of the past decade have seen healthy portfolio gains with many markets at double or triple the level of the lows.

Long-term investment history has seen diversified portfolios return high single-digit percentage returns on average, over decades. It’s tempting to focus on the large market corrections, which inevitably happen, but if you have long-term savings to invest, such as for retirement, then a diversified portfolio can be your best shot at a decent return to help your savings grow. Cash can be tempting for the stability it offers, but over the longer term cash typically fails to keep up with rising prices.

The Solution

The solution is for Millennials to start to dip their toe into the markets. Of course, there are reasons it may not make sense to be fully loaded up on stocks, and it maybe easier to build up a portfolio position steadily over the course of several years. However, even though the current U.S. market is on the expensive side, a globally diversified portfolio can still be a sensible choice for the longer term investor. Stocks may be risky as a short-term investment, but if you are able to hold them for decades, then the risks of losing money decrease significantly, if history is any guide.

Plus, combining stocks with bonds and real assets, such as gold, can make for a smoother portfolio. This sort of portfolio will have more ups and downs than cash, but the long-term gains are likely to far be higher than cash too. As a millennial, it may be tempting to focus on the risks of big short-term loses, as market corrections are vivid events. Nonetheless, being unable to reach financial security later in life is a big risk too. By trying to avoid short-term losses, Millennials may be putting their long-term financial success at risk.

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