In the past couple of years, the financial media has been full of stories about the risk aversion experienced by millennials. According to surveys and studies, millennials are reluctant to invest in the stock market. Many of them came of age in time to watch their parents lose retirement money in the aftermath the financial crisis of 2008 (although hanging in there rather than selling would have resulted in recovery and then some).
That’s too bad.
Savings Accounts Don’t Build Wealth Effectively
While savings accounts can be great places for liquid funds used for emergencies, the reality is that they won’t help you build wealth effectively over time. Try any online calculator that figures compound interest, and you’ll find that the interest returns from a savings account are woefully unable to help you build enough wealth for a comfortable retirement. You probably won’t even beat inflation if you keep your money in a savings account.
On the other hand, investing in the stock market is likely to help you build wealth more effectively over time. The average annualized return for the S&P 500 since its inception is right around 9%. Even figuring a more modest annualized return of 6%, it’s easy to see that the stock market is better equipped to help you build your nest egg than a savings account that offers a 1% APY.
Why the Stock Market Makes Us Nervous
Part of the reason the stock market makes us nervous is due to the fact that we hear about it all the time. We hear about the way it rises or falls every day in the news. When a big crash happens, we hear about it constantly. The story you don’t often hear is that, over time, the stock market as a whole has yet to lose. The stock market hasn’t come out negative in any 25-year period yet. Yes, the stock market can deliver negative returns in any given year, or even during a five-year or ten-year period. But over the long haul — the time frame of three to four decades that you will be building your retirement account — the stock market hasn’t lost.
Index funds can make good choices if you want to quiet some of your fears. You may not see amazing returns, but you are more likely to see steady growth over time, since index funds take advantage of segments of the market, rather than individual stocks. If you invest in an all-market index fund, you have access to the long-term gains of the market as a whole. Even if there are down years, there is a good chance that overtime you’ll still see growth.
Hopefully more millennials will become educated about the tools available to take advantage of the stock market, and invest more in risk assets as they see that cash just doesn’t offer the growth needed for effective wealth building.
How about you? Are you invested in stocks?
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