Content Provided by Michael Hadden – Investment Research Analyst
Seriously. Just go online and look. In fact, this article cites 70 different things millennials have “killed,” an impressive feat for a generation spanning the ages of 22 to 37. So, if millennials are so great at destroying things we know and love, are they also destroying investing? Well, that depends on how you look at it. On one hand, millennials are cited as being the best generation at saving! Who would have known? I thought we couldn’t do anything right! On the other hand, millennials prefer to hold liquid, cash-like securities rather than invest in the stock market. You can hardly blame them. Millennials have witnessed two extreme bear markets in their lifetimes.
Saving is great, and it is definitely at least half the battle when it comes to preparing for retirement. But without the markets, investors are missing out on the gains they consistently generate. The last 10 years demonstrate some astonishing facts. If a person invested $10,000 at the start of 2009 in an index fund of the S&P 500, he would have just under $40,000 as of August 31, 2018. If he invested the same $10,000 in cash-like securities, he would have $10,377.
This may be an unfair comparison because the past 10 years have been fantastic for the S&P 500, which saw an annualized return of about 15%. But what might be surprising is that 10-year returns above 10% are not all that uncommon. The chart below shows that 10-year annualized returns are between 10% and 20% about 30% of the time! Many of these probabilities surprise me. It is a good reminder that markets go up more often than they go down, and over long periods, they are almost always positive.
Another reason millennials might cite to stay out of the stock market is that returns have been so good, we are bound to see a downturn. Investing in the market at a peak is always a concern, but maybe it shouldn’t be. Investing $1 at each year’s peak point since 2000 compared to investing $1 in cash at that time shows that there is no bad time to join the market if investors have a long time horizon. Over the 17-year period represented in the chart below, investing at the S&P peak still outperformed cash by more than 7%!
This idea is reiterated in the charts below. There is a slim difference between market returns after reaching a new high and returns after a market correction. In fact, returns in a one-year look-ahead period are higher after new market highs than after a market correction! We believe that there truly is no bad time to invest in the stock market.
Millennials struggle with the concept of the stock market because they have seen two of the worst market downturns and nearly a decade of no returns. Even with the stats presented in this article, it can be too emotionally difficult for millennials to put their hard-earned money into the stock market. CLS helps mitigate some of this hesitancy with our Risk Budgeting methodology, which begins with a risk questionnaire that considers an investor’s ability and willingness to take risk. Investors are then assigned an appropriate Risk Budget score and their portfolios are built accordingly. That means clients can rest assured that their money is invested at a risk level they can be comfortable with. Having confidence in a portfolio allocation can go a long way in keeping a client invested in the markets.
Millennials catch a lot of grief for “ruining things,” but having established great saving habits they are well on their way to being great investors. If we can get them to trust in asset managers, such as CLS, they may just be able to “kill” our retirement savings crisis.