Gen Y Folly: Not Investing
Coming of age and entering the workforce in the wake of a financial crisis, our younger generation became skeptical about investing. But the fact is, millennials need to invest as the stock market is one of the best ways to grow wealth long term.
The U.S. stock market, as measured by the Standard & Poor’s 500 index, dropped 37% in 2008, the first full year of the Great Recession. Watching and hearing about how investors lost considerable money in the stock market, the millennials, also known as Generation Y, learn to stay away from this pain.
The generation who are in their 70s and 80s now had similar jarring experiences with the stock markets when they were younger. This older generation, sometimes called the “Depression babies,” avoided banks and investing after the 1929 stock market crash.
Depression babies likely grew up in homes where the discussion was not about if there would be another Great Depression, but when it would occur and how they would survive it. Those scars are deep and long lasting.
A Gallup poll shows just 27% of 18-to-29-year-olds hold stock or funds in 2014, down from 33% before the recession in 2008, according to Bloomberg News. Even affluent millennials hold 52% of the money in cash, according to a UBS survey released in the first quarter 2014.
So this generation saves money in low-risk, low-return cash accounts, due to rock-bottom interest rates. That means they not only miss out on higher potential returns, but they continue to lose purchasing power over the years because of inflation.
If you have family members or friends who are millennials, and shun the stock market, please tell them:
They have come to a wrong conclusion about the stocks and their risk exposure. The stock market has a history of short-term declines. Sometimes severe declines like in 2008. However, these declines have historically been short-term, and the stock market rewarded patient investors.
This generation, like all generations, needs to build their retirement accounts. They need to save money for a longer lifespan than any generation has experienced. This longevity reality requires them to invest in the one asset class, which not only keeps pace with the cost of living, but actually grow faster than inflation – the stock market.
The lesson that millennials need to learn is that investors who do not see the long-term value, at times severe market declines, lose money. The lost is the result of panic selling at the market bottom. Over the past 10 years, investors who stayed the course did well: The S&P 500 earned an 8.5% average annual return.
Our 20s and 30s is the time we can take more risks of investing in equities, and the time value of having 40 years before retirement is significant. This long-term focus requires an understanding of short-term normal volatility in the stock market.
Encourage your family member or friend in this younger generation to spend the time necessary to understand the long-term benefit of investing in the stock market.
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