The future generation of America is reluctant to get involved in one of the greatest traditions of the American economy. The golden and all-revered stock market that Generation Xers and Baby Boomers swore by has failed to engender the same enthusiasm from the millennial generation. Millennials are widely considered to be the most conservative generation of investors since the Great Depression. And many older and "wiser" financial talking heads crowd the likes of CNBC, Bloomberg, and Yahoo Finance to didactically talk down to my generation about our foolish behavior.
It's true that Millennials have largely missed out on the post Great Recession bull market. From 2009 through 2013, the S&P 500 averaged an 18% yearly return. However though, past returns aren't enough to sway Millennials from thinking about getting into the stock market. Realistically, nothing might be able to persuade a majority of Millennials to invest more (except hopefully this article, of course.) But upon examination of expected future returns on the S&P 500, it's clear that Millennials should start getting involved in the stock market.
Millennials' Distrust of... Everything
Millennials don't play the stock market as aggressively as other generations and many assume this is due to an inherent distrust of the market developed after the dotcom crash in 2000 and the financial crisis in 2008. Partially, this is true. But this isn't the whole story. Yes, Millennials have seen tremendous amounts of wealth be wiped out not once, but twice in their lifetime. However, they have also seen the booms of the market in the late 90's, the mid 2000's, and right now (in the last five years).
Millennials are turned off by market volatility to an extent, but there are other factors that have deterred millennial investment in the equities market. First off, Millennials not only distrust the stock market, but they seem to distrust everyone and everything!
In a report on the Millennial generation released by the Brookings Institution, surveyors asked Millennials if they agree with the statement "most people can be trusted." Only 19% of millennial respondents agreed with the statement compared with 31% of Generation X and 40% of Baby Boomers. Millennials distrust big corporations as well: 83% believe that there is too much power concentrated in the hands of a few big companies and 66% believe that businesses make too much profit. It also doesn't help that Millennials tend to hate banks and the financial industry in general. Apparently, 71% of Millennials would rather "go to the dentist than listen to what the banks have to say." Among millennials' 10 least-liked brand names were the Big 4 banks that continuously get into hot water for screwing over one person or another.
Thus, it isn't surprising that 50% of Millennials claim they will never feel comfortable investing in the stock market. They have seen wealth evaporate instantly twice in their lives and they aren't driven by monetary gains as much as any prior generation. This leads to them holding a staggering 53% of their savings in cash compared to just 23% for all other age groups, and half of Millennials don't want anything to do with the stock market.
The Retirement Issue
Talking heads on business channels seem to be in agreement that Millennials' choice not to invest their money in the market dangerously diminishes the amount of money they'll have upon retirement. The combination of longer life expectancy, uncertainty in the future solvency of Social Security, and the fact that the average student enters the workforce with $30,000 in debt means that Millennials need the gains of the market more than ever to ensure a steady future.
This is a valid point. The bull market of the past few years has been huge and it really is a shame that the Millennial generation has missed out on the tremendous gains of this market. It's hard to disagree with the statement that Millennials would have been better served if they invested their money in an ETF or mutual fund that tracked the S&P 500 after the Great Recession. The problem with hindsight though is that it always overlooks the risk aspect associated with an investment. Looking back on it, the decision to invest in the S&P 500 after the Great Recession was a no brainer: but what were people thinking at the time? How much risk were people incurring by investing in the market at that moment in time?
What Are Millennials Thinking?
Consider the fact that the majority of Millennials working now were born in the 1980's. Think about what that generation has seen. Not only have they witnessed tremendous volatility and two market crashes, but also relatively mediocre returns in the stock market. The S&P 500 has returned 4.68% on average for the past 15 years. This is a fine number (although it doesn't include fees associated with ETFs or mutual funds that track the S&P 500), but not enough to entice the generation to start investing more aggressively.
Should Millennials Invest Right Now?
If you're a millennial reading this, you want the bottom line: should you invest in the market right now? The answer to that is yes. Historically speaking, the market always pays off in the long run.If you invest your money right now in the market, and let it grow for 20 years, you will make money. There has never been a 20 years cycle since 1926 where the S&P 500 has not returned money on its investment. But 20 years is a long time. How about within the next few years?
The S&P 500 has skyrocketed since the Great Recession. Returns are through the roof and investors are so confident, they're even returning to penny stocks. But nobody ever wants to buy high and sell low, and clearly the market is high now. The question: will it continue to get higher?
Based on the recent returns the S&P 500 has seen, Charles Schwab predicts annualized returns of between 6 and 7 percent for the next few years. Some more optimistic forecasters like David Kostin, Goldman Sachs' top equities strategist, see 6% growth in 2014, 17% in 2015, and 23% in 2016. In the shorter term, Bloomberg predicts the S&P 500 to lose 40 points by September. The Financial Forecast Center predicts the S&P will lose 8% of its value, 155 points, by the end of the year. In summation, very short-term growth prospects are not good for the S&P, but growth over the next few years is still projected to be positive.
Millenial investors concerned about buying high should maybe wait until later this year, when the S&P 500 is expected to dip and then move some money into a mutual fund or an ETF that tracks the S&P 500. Based on current projections, this would be the smart thing to do. Over the next few years, projections look good and if Millennials are prepared to hold their money in the stock market for 20 years, then it's always a good time to invest in the market.
Copyright 2014.Equities.com. All rights reserved.
Original headline: Chasing the Bull: Should Millennials Really Start Investing Right Now?
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