Are You Making the Biggest Investment Risk of All?

By Matt Bell on 14 June 2016 0 comments

When you're young, you're full of bravado. You're willing to step out on the skinny branches and take some risks. At least, that's the stereotype.

When it comes to investing, though, it turns out that today's young adults are anything but risk takers. According to a recent study by UBS, Millennials (people ages 21–36) are almost as likely as people age 68 and older to describe their risk tolerance as conservative. And they're putting their money where their cautious mouths are. The average Millennial investor has more than half his or her portfolio in cash!

The problem is, when you're young, one of the riskiest things you can do with your investments is to play it too safe.

That's because, over time, inflation eats away at your buying power. Even in today's low-inflation environment, the cost of living is growing faster than money in bank savings accounts. You simply need to earn a better rate of return, and that means being willing to accept more risk.

If you're young and feeling hesitant about investing, here are two factors that may be holding you back, along with some suggested solutions.

Lose Your Fear of Losing Money

In 2008, the U.S. stock market tanked by 37%. Imagine having $100,000 invested at the start of that year and ending up with a mere $63,000.

Whether you were just a kid at the time or a young worker, that's a frightening bit of market history. But keep this in mind: Since bottoming out in March of 2009, the market came roaring back, nearly tripling in value by the end of 2015.

The best way to overcome a fear of investing is to set your expectations by gaining some understanding about the market. Long-term, the stock market has outperformed bonds, real estate, gold, and cash. However, what many people fail to take into account is how bumpy the ride can be at times.

To be successful as an investor, you have to expect some ups and downs. If you're a Millennial, you have time to ride out the ebb and flow of bull markets and bear markets. So you can afford to invest aggressively. What you may need to develop is the stomach to handle the ride.

Knowing a little stock market history, and expecting some downturns along the way, will help you accept an age-appropriate level of risk in your portfolio (if you're young, think mostly equities), and then stay invested no matter what's happening in the market.

Develop Your Sense of Urgency

It's easy to think, "I'm young. I can afford to wait a while before I start investing. Right now, I have other priorities, like making my student loan payments."

But there's a high price to be paid for waiting. Consider this. If you invested $200 a month for 40 years, that would amount to $96,000. And if you earned a very realistic average annual return of 7%, you'd end up with about $525,000. That's what happens when you combine periodic investments with a decent rate of return and then allow time to work its magic through the power of compound interest.

But what if you waited 10 years? Investing $200 a month for 30 years would amount to $72,000. However, because of this late start, you'd end up with less than $245,000.

Wow. You only invested $24,000 fewer dollars, but you ended up with nearly a whopping $300,000 less!

That should motivate you to find the money to invest now. Keep your housing costs reasonable. See if you can get by without a car or, if you're a two-car family, consider becoming a one-car family. Freeing up a couple of hundred dollars a month could make hundreds of thousands of dollars of difference long-term.

If your employer provides a match for some of the money you put into its 401K plan, that's the easiest money you'll ever make. You have to take full advantage of that. So, at the very least, invest enough to get the full match.

Remember, if you're a Millennial or younger, you have an asset many older people wish they had. You have time. Make the most of it by getting started as a stock market investor as soon as you can.

What's holding you back from investing?

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Are we talking about 1% Millenials or middleclass Millenials? Provide a statistical breakout by economic group, age and discretionary income please!