Millennials, Americans born during the 1980s and ‘90s, have good reason not to trust the stock market. After all, the economy crashed just as they were graduating college, forcing many to move back in with their parents and nipping their career prospects in the bud. Like the survivors of the Great Depression before them, they are a generation of financial conservatives, generally unwilling to gamble with their earnings in the same ways their parents did during boom years.
They might vote like young people, but they invest like they’ve already retired; at least, according to a number of recent studies of investment preferences. For survey respondents in the age ranges of 22-32, it was common to have 75 percent of retirement savings in cash and bonds, with only 25 percent invested in equities, turning the “Rule of 100” on its head. The question is:
When is risk aversion actually the bigger risk?
Compounding and long-term growth potential of investments could benefit this generation greatly over the next few decades. But it’s not just opportunity cost that stands to slowly drain Millennial bank accounts – it’s also inflation, combined with a false sense of security. When you invest conservatively, you believe you can’t lose money. Nothing could be further from the truth (you’re just losing money slowly). Over time, the purchasing power of cash decreases, which in a long game like retirement can lead to financial ruin just as surely as betting it all on black in Las Vegas.
How to balance lower risk with higher returns
Knowing what a truly balanced portfolio entails is the best way to combine lower risk with higher returns. Essentially, a balanced investment portfolio is one in which not all investments are subject to stock market risk. This could include investing in real estate, choosing a range of equity income classes to balance bond-heavy portfolios, and looking into solutions for securing a lifetime income (building your own pension plan). If it’s one thing Millennials can do, it’s think outside the box to solve their problems.
While many of those who make their livings off of the stock market are in a blind panic about this new generation of market-wary Millennials, and have been trying to reassure these skittish 20-30-somethings through a barrage of articles that they have plenty of time to “bounce back” from market declines, I respect the return to prioritizing saving and fiscal responsibility.
Instead of urging the frugal generation to dive into the deep end of the stock market, I prefer to encourage conscious conservatism: Understand the risks inherent to stashing cash in your mattress, and take sensible precautions against inflation. Those precautions may lead Millennials back to the stock market, or to annuities, or to create another financial vehicle entirely. Either way, their choices will have a significant impact on all of our financial futures. Let’s do our best to ensure that their choices are fully informed.