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الجمعة، 15 سبتمبر 2017

Millennials Have a Fear of Investing, but Please Don’t Call it Irrational

Millennials are killing a lot of things, or so we hear. Is the traditional method of saving for retirement by investing next on their list?

LendEDU surveyed 500 millennials who said they are saving for retirement and found that 41% are skipping the stock market and saving for retirement using regular old savings accounts. “We estimate that avoiding the stock market will cause millennials to miss out on over $3.46 million by retirement at age 65,” Mike Brown of LendEDU wrote.

LendEDU used data from the Bureau of Labor and our generally accepted rules of personal finance to hypothesize about what could happen to the retirement savings of someone who begins saving in their late 20s. LendEDU imagined someone with a starting salary of $40,352 who saves 20% of their salary, so this experiment starts out pretty optimistically.

Under a probability simulation, someone who started saving in 2016 under the above-mentioned circumstances and literally stashed their cash under the mattress would have about $681,000 saved by 2054, LendEDU found. Put that same retirement savings in a traditional savings account, and that person could expect to have about $1.5 million over time.

But someone who put their retirement savings in an investment portfolio could have accumulated about $5 million by 2054. Granted, that’s based on LendEDU’s ridiculously lofty estimate assumes you’ll see consistent growth of 11% per year for that account. Meanwhile, Bankrate’s 401(k) calculator says that expecting a return rate of 6 or 7% is much more reasonable.

Based on an analysis LendEDU ran 10,000 times, you have a 98% chance of at least doubling your savings through investing in the market, Brown explained.

LendEDU asked 500 millennials ages 25 to 34 why they made their choices to either invest their retirement savings in the stock market or to avoid it. More than half of respondents said the financial crisis of the last decade kept them from investing in the stock market. Almost 60% said they were afraid of the stock market.

Are Millennial Investing Fears Really Irrational?

LendEDU calls these millennial investing fears irrational, noting the stock market “has historically bounced back and as long as you demonstrate patience, you will be rewarded many times over.”

But a millennial might argue that it’s not just the stock market standing in the way of traditional investment methods. Millennials are skeptical of putting their trust in financial institutions that they believe have wronged them or their families in the past.

And it’s not just Wells Fargo facing the ire of millennials: This generation voted all our leading banks “among their least loved brands” in the Millennial Disruption Index last year, TechCrunch noted. According to that index, 71% of millennials would rather go to the dentist than listen to what a bank has to say.

What do millennial feelings about banks have to do with millennial feelings about the stock market? Everything.

“At least part of this dissatisfaction [with banks] stems from the perception that banks are nickel-and-diming millennials as customers,” Lisa Servon wrote in “The Unbanking of America.” “Those I interviewed complained about the high cost of using out-of-network ATMs and other fees they found frustrating and often inexplicable. Millennials don’t think banks should be charging them when the banks are holding on to their money,” she wrote.

If millennials don’t trust mainstream banks to meet their financial needs, how can they trust investment banks, brokerages and other wealth management firms? Servon even pointed out in “The Unbanking of America” that of millennials, “nearly one in four trusts ‘no one’ when it comes to advice about money.”

Still, many millennials embrace investing opportunities, whether they be passive long-term investing with index funds or tinkering with employer-sponsored 401(k) account settings to generate the largest return.

Compound interest on a savings account can help a nest egg grow, but investing that nest egg is what can really help modest contributions skyrocket over time into a comfortable retirement fund.

Jason Kirsch, a certified financial planner and president of Grow, says “irrational” is the wrong word to describe millennial views of investing and the stock market. His book, “The Millennial Advantage: How Millennials Can (And Must) Be the Next Great Generation of Investors,” describes the similarities between the personalities of children of the Great Depression and millennials who grew up during the Great Recession. Combine their distrust of financial institutions with a lack of understanding of investing and risk, and you get one big bundle of skepticism.

“The financial industry makes no attempt — even worse, a negative attempt — to try to simplify this process” of growing your money through the risks of investing, Kirsch says.

He advised millennials to get comfortable with some financial risk. “They have to assume some short-term risk for the long-term life of their money,” Kirsch says of millennial savers. “The real risk is not making those investments. That’s a long-term risk, where you’re sitting on the sideline while inflation eats away at your nest egg.”

If you’re holding cash earmarked for retirement in savings, Kirsch says not to throw it all in an investment account right away. Whether you choose passive or active investing, contribute to your investment account on a periodic schedule to gradually build the value of that account and weather short-term market fluctuations.

Lisa Rowan is a writer and producer at The Penny Hoarder.

This was originally published on The Penny Hoarder, one of the largest personal finance websites. We help millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. In 2016, Inc. 500 ranked The Penny Hoarder as the No. 1 fastest-growing private media company in the U.S.



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