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You
can learn a lot from your parents, but when it comes to
investing, you might want to be skeptical about
mimicking them.
A
recent survey of Generation Y shows that many 18- to
30-year-olds have been so unnerved by the savagery of
the stock market in the past few years that they are
investing as conservatively as their parents and
grandparents. These young adults have watched their
parents struggle the past few years and are so afraid of
the stock market that they are determined to keep their
savings safe.
For
grandparents, it makes sense to be careful about the
stock market. For parents about to retire, moderating
stock market exposure is also smart. But people in their
20s who act like 50- or 60-year-olds with money could be
making a grave mistake. Young investors may be playing
it so safe with 401(k)s and other retirement savings
that they will position themselves for a train wreck. By
retirement, they will be far short of money.
According
to the MFS Investing Sentiment Survey by the Research
Collaborative, 40 percent of Generation Y has concluded,
“I will never feel comfortable investing in the stock
market.”
“Never”
is a long time. But if you are among this group and have
been warned by parents to stay clear of stocks, this is
why you might want to reconsider.
First,
it is true that the stock market can be brutal, and you
have just witnessed one of the fiercest periods in stock
market history. Stocks declined 49 percent in 2000-2001;
then just as your parents recovered what they lost
during that horrible bear market, the financial crisis
arrived late in 2007 and destroyed 57 percent.
You
might have heard your parents curse stocks and mourn the
losses in their 401(k)s. Their stress might have been
intensified by the worst job market of their lifetime or
a home plunging in value.
Boomers
went through much of their adulthood believing the stock
market was a sure thing. In the 1980s, it delivered
gains of 17.6 percent a year on average, according to
Ibbotson data. In the ’90s, it was 18.2 percent. As
boomers approached retirement, one in four had 90
percent of their 401(k) money invested in stocks, a
dangerous amount for someone close to retirement but not
necessarily for someone with 40 or 50 years of saving
ahead of them.
A
central theme in investing is to select a mixture of
stocks and bonds based on how close you are to
retirement. At your parents’ age, you must be
cautious, perhaps investing no more than 40 or 50
percent of retirement money in stocks so a loss
doesn’t hit you just before you retire.
But
in your 20s, you are likely to enjoy plenty of good
years in the stock market if you keep adding a little
money from each paycheck to your 401(k) or an IRA.
Though you could suffer losses in the current rough
period, over many years your early deposits in stock
mutual funds in a 401(k) or IRA are likely to grow well.
Historically, despite the awful periods in the market,
stocks have gained 9.9 percent on average annually since
1926, and bonds have gained 5.5 percent, according to
Ibbotson.
A
look back at history might provide courage. During the
Great Depression, stocks crashed hard. The market
dropped 86 percent and took more than 15 years to
recover. It would have been a disaster for a person near
retirement. An investor who put $10,000 into the stock
market just before the crash had just $6,000 10 years
later. But if you had been 25 years old and invested
$10,000 in the stock market just before the crash, you
would have had about $210,340 at retirement 40 years
later. Time is on your side if you invest in stocks. You
are investing in the long-term growth of the economy.
But
you might say: Why take the chance?
You
wouldn’t have to if you were willing to save huge
portions of your pay every year. But most people can’t
stash enough into a savings account or safe U.S. bonds.
Let’s say you are 30, you save $5,000 a year and earn
the historical averages on your investments until
retirement. In a savings account, you would accumulate
about $247,000 by the time you retire. In Treasury
bonds, you would have about $720,600, and in stocks,
$2.3 million. If you divided your money half in stocks
and half in bonds, you would have about $1.5 million.
Perhaps
$720,600 sounds like plenty to you. But remember,
inflation requires you to have much more money in the
future than you would today for a comparable standard of
living. If you are used to living on $50,000 a year at
age 30, you might need about $114,000 a year by
retirement. Try http://www.calcxml.com/calculators/ret05?sknequals#results.
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