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Smart Millennials Can Be Scammed

In the past, I have spoken about opposing outlooks on whether the market was over-valued and due for a correction or fairly-valued and expected to continue higher. While I’ve urged older investors to consider taking some profits or getting a little more conservative while this all plays out, I urged my younger listeners—so-called millennial’s or Generation Y—to consider staying invested in the market for the long run and not obsess about a downturn because over long investment horizons, stocks have the potential to deliver higher returns than other security classes and have the chance to out-perform inflation, despite ups and downs in the market. Provided, of course, that past performance doesn’t guarantee future results, the risk of losing principal is higher with investments that have higher return potential and investors stay invested in the market and don’t move their money in and out. Basically, I said it’s wise to ignore all the pundits’ advice on market timing.

Investment Advice For Millennials

Millennials, or Gen Yers, are those who were born between the early 1980s and the year 2000 and are now in the 15 to 35 age group. These young men and women have most of their working lives ahead of them with retirement 30 to 40 years away—enough time to potentially accumulate wealth through wise investments and reach retirement goals.

In fact, millennials could easily follow simple plans such as investing their savings into a few diversified portfolios such as Index portfolios, ETFs or passively managed portfolios with low management fees. Then, as they reach the age of 55 or so, they can consider shifting their portfolio from stocks to a combination of 50%-70% stocks and about 30% bonds and rebalance periodically.

Through the years, they should consider sticking to their simple plan and largely ignore the financial media and short-term market fluctuations.

I’d also urge these younger investors not to panic or sell when the market goes down or buy after the market has already gone up. Consider steadily staying the course and investing in the market each month, through ups and downs.

Ignore The Noise

I know. Following this is way more difficult than it sounds because of all the noise and genuine confusion. Nobel Prize-winning economists such as Robert Shiller are saying the market is ripe for a correction, and investment pros like Warren Buffett are saying the market’s just fine. So, my tip to Gen Y is to just ignore both sides and stay focused on your goals towards retirement portfolio building.

Millennials, Get Over Your Risk Aversion!

Here’s the rub. Gen Y seems rather risk-averse and doesn’t have a favorable view of stock investments. For example, a recent article in U.S. News and World Report by Dan Solin, a wealth advisor, was titled “Smart Millennials Can Be Dumb Investors.” Its basic premise is exactly that. This millennial generation is fairly risk-averse and not inclined to put its money in the market, in part because early in their lives, they’ve witnessed the recession in the 90s, the dot-com bust, 9/11, and the recent 2008 financial meltdown. They’ve lived the horror first hand as impressionable young adults—the severe adverse financial impact these events had on family and friends with lost jobs, foreclosed homes, etc.—and blame the stock market for all the misery. I also hope they have paid attention to the incredible rebound in stock prices since 2008 and can now see that volatility itself is not necessarily the end of the world.

Dan Solin’s article also mentions several studies that show millennials as being more materialistic and overly concerned about money, fame, and image. This is understandable because they’ve grown up in an information-heavy computer and Internet age, more influenced by fame, fortune and social perceptions, and with more time spent in front of computer or TV screens than out playing in their neighborhoods.

Research also shows that Gen Yers are not into investing and have a basic misunderstanding of risk.

Understand Your Risks

Research also shows that many Gen Yers are not into investing and have a basic misunderstanding of risk. Surveys show that almost half of all millennials are opposed to taking any risk with their money and just feel safer leaving their savings in cash, CDs, or bonds. Surveys also show that 70 percent of them have risk levels that are moderate, somewhat conservative, or conservative. As a result, this generation also has dramatically higher cash allocations and only 28 percent of those surveyed say that long-term investing is a major component of their plan to help achieve success, compared to 52 percent for non-millennials!

With Long-Term Investing, Cash Is Not King

While an all-cash strategy may seem conservative, it’s simply not prudent because cash in the bank loses significant purchasing power over time due to inflation. An all-cash portfolio will simply not keep pace with inflation, so millennials need to understand that returns from even a very conservative portfolio may at least keep pace with inflation.

They need to change how they perceive risk or face a future where they fall short of reaching their financial goals for retirement. Millennials need to understand that not all risk is bad and that without risk, it’s impossible to achieve inflation-beating returns.

No Free Lunch

In fact, often times, millennials fall prey to hucksters who tout investments that offer high returns with seemingly little risk. Such high, risk-free returns are simply not possible. So I want to make sure my younger listeners don’t fall into that trap and clearly understand that returns are almost always tied to the level of risk you’re willing to take.

Embrace Risk

I want you to embrace a reasonable amount of risk. At the very least, make sure your investments keep up with inflation. Be conservative but not overly so and certainly not to the point where you’re standing by as the purchasing power of your cash in the bank slips away, like sand in an hour-glass.

Just so you know, there is one glaring exception to the investing attitudes of millennials. Tech-savvy employees in Silicon Valley have embraced investing and are flocking to investment firms that understand how wealth creation really works and helps to keep most of those earnings in the pocket of the investor rather than the salesman.

I hope more millennials will follow their lead, shed demons over market crashes past, and take concrete steps towards building a secure retirement portfolio with inflation-beating returns.

Disclaimer: The Steve Pomeranz Show and United Capital Financial Advisers, LLC are separate and unrelated companies. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. There are no investment strategies, including diversification, that guarantee a profit or protect against loss. Past performance doesn’t guarantee future results. Equity investing involves market risk, including possible loss of principal. All information quoted in this piece is for informational purposes only, and the author does not warrant the accuracy, completeness, timeliness, or any other characteristic of the information. All information and data are driven from publicly available information and has not been independently verified by the author.