How Financially Prepared Are Millennials For The Future? Not Very
Thanks to the technology-fueled alternative finance revolution, there are now more investment opportunities and options than ever before. Unfortunately, many millennials are not taking advantage of the chance to put their money to work for them and get a head start on their savings while time is still on their side.
A rough start
While the 1980s and 1990s ushered in unprecedented stock market returns for U.S. investors, many millennial investors were welcomed to the world of Wall Street by a pair of the worst market collapses in decades: the Dot Com Bubble in 2000 and the Financial Crisis in 2008. Millennials had only begun to dip their toes into the investing waters only to have them bitten off by severe market sell-offs.
Understandably, a recent Capital One Investing survey indicated that 93% of millennials are less confident about investing due to mistrust of the markets and/or a lack of investing knowledge. A 2015 Bankrate survey showed that only 26 percent of adults under 30 own any stocks at all. A related Goldman Sachs study found that only 18 percent of young adults trust the stock market as the best way to save for the future.
State Street recently revealed the end result of these fears: millennials are holding about 40% of their portfolios in cash. Unfortunately, that behavior ultimately leads to missing out on critical years of compounding returns when saving for retirement. While it’s reasonable for millennials to be skeptical of the market in the short-term, history and math show that buying and holding stocks at a young age has been the easiest way to retire wealthy since the turn of the 20th century.
From 1900 to 1999, the stock market averaged a 10.4% annual return. At that rate of return, investing just $5,200 per year ($100 per week) every year from age 30 to age 59 would allow an investor to retire a millionaire. Albert Einstein once spoke of the power of compound returns. “Compound interest is the eighth wonder of the world,” he said. “He who understands it, earns it… he who doesn’t… pays it.”
There’s no question that the Dot Com Bubble and the Financial Crisis were devastating for the stock market in the short-term. But the key to stock market investment is also the key to compound returns: time. Even an investor that bought an S&P 500 index fund at the height of the Dot Com Bubble would still find themselves up more than 40% today, well more than the 0% return of cash.
Even if millennials are aware of the benefits of owning stocks, mistrust of the financial community remains a hurdle. However, what millennials lack in trust for the stock market, they make up for in trust of themselves. Eighty-seven percent of millennials say that they trust themselves to make investment decisions on their own. That number is way ahead of the 68% of seniors who report a similar level of investing self-confidence.
Tech-savvy millennials can now place their faith and their savings in alternative market investments, such as robo-advising sites and market motifs. Robo-advising companies like Wealthfront and Betterment allow clients to access automated money management services and algorithm-based trading advice. Robo-advisors operate based on the same underlying market principles that human financial advisors use, but clients don’t have to deal with management fees and the possibility of human error.
For millennials that want to hand-select their own investment portfolio but maintain the safety of diversity, Motif Investing offers alternatives to traditional ETFs called motifs. Motif Investing customers can create their own “homemade” ETFs by selecting up to 30 stocks to include in a single motif, or theme.
Millennials that witnessed the last two market downturns have plenty of reason to be leery of the stock market. However, they must remember that, when it comes to retirement investing, a couple of years or even a decade of market volatility has relatively little impact on long-term returns. Alternative finance technology offers an unprecedented degree of control and transparency to millennial investors. Luckily, you don’t have to be Albert Einstein to recognize the power of starting a long-term market investment strategy at a young age and letting compounding returns work in your favor.
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