Today’s blog post is aimed at “Millennials,” those aged 18 to 37. While the vast majority of my readers are older than that, many of us have children who are in that group – which really need to hear this information. So please pass it on to them – since many have no idea.
When it comes to Millennials and investing, cash is king. That’s because more than any other generation, Millennials’ idea of investing is to park their money in cash or cash equivalents. A recent report in USA TODAY said that 30% of Millennials believe cash is the best long-term investment. History shows that’s a terrible choice over the long-term. Let’s take a look at the numbers.
From 1926 through July 31 of this year (92 years), cash averaged a 3.34% annual gain, according to Morningstar Inc. In sharp contrast, large-cap stocks have returned an average of 10.17% a year over the same period, and small-cap stocks have returned an average of 12.14%.
So stocks have delivered over triple the amount one would have earned in cash over the last 92 years. And cash has not returned anywhere near 3.34% in the last seven years of near “zero-bound” interest rates. Until recently, money market funds have returned an annual average of less than 1%.
Those gains by stocks have occurred despite factoring in major setbacks that socked the market in the Great Depression; when Japan attacked Pearl Harbor, dragging the US into World War II; in the dot-com bust in the early 2000s; and in the Great Recession of late 2007 to 2009.
Millennials prefer cash over stocks because of personal experiences. Older millennials saw both the dot-com bust (which began in 2000) and the financial crash (that began in 2007) within a few short years of each other, and the impact those had on their parents, and indirectly on them. They are understandably leary of investing in stocks.
Millennials Should Be Investing in Stocks, Not Cash
Yet so many Millennials are making a big financial mistake by parking most of their money in cash. Unfortunately, many Millennials are unaware of how much more stocks grow than cash or bonds over the long-term. Fortunately, some of them are figuring this out, but we older folks need to get the word out to more of them.
Here are some more eye-popping numbers you can use to convince them.
Suppose you contribute $5,500 (the regular maximum allowed) a year to an IRA. If you park your money in cash — let’s say 30-day Treasury bills — after 40 years your stash will have grown to over $500,000 if it grows at the same historical average rate. But if you put it to work in an S&P 500 Index fund, it will be worth almost $4 million after 40 years at the historical rate of return.
Given their young ages (and assuming they take a long-term view of their investments), Millennials should have most of their investable assets in stocks, stock mutual funds and/or stock ETFs. There are thousands of stock mutual funds and ETFs available, and Internet-savvy Millennials should have no trouble finding them.
Even if they pick a mediocre fund, the difference is staggering. They just need to know that cash is one of their worst possible choices. They need to understand that even though stocks can be volatile in the short-term, they have been among the very best investments over the long-term.
Millennials Who Do Invest in Stocks Flock to “Target Date” Funds
Mutual fund and ETF giant Vanguard released a new study last month which found that among Millennials who do invest beyond cash, most put their money in stocks. And specifically, most prefer so-called “target-date” funds.
Target-date funds are mutual funds or ETFs that are designed to invest in stocks and bonds that are in allocations deemed to be appropriate as one’s age advances toward retirement. In one’s earlier years, the allocation is heavier toward stocks; as one approaches retirement, the allocation is heavier toward bonds.
I am not a huge fan of target-date funds, but most are a great improvement over keeping your money in cash. So it’s no surprise to me that most Millennials who do invest beyond cash put their money in target-date funds. They’re widely available, easy to understand and you can pick one that corresponds with your expected retirement date.
According to the recent Vanguard study, 82% of IRA plan participants younger than 25 allocated their stock portfolio to target-date funds, while 67% of those between 25 and 34 were invested in these age-related funds. That’s huge!
While it is encouraging to see that more Millennials are realizing that stocks are far better than cash over the long-term, the recent Vanguard study found that 66% (two-thirds) of Millennials still feel that keeping their money in cash, or maybe buying a house, is the best way to go.
If you know Millennials who are sitting on a pile of cash, do them a favor and refer them to Halbert Wealth Management. We have several professionally managed investment strategies that can help get them on the right track.
This is relative to the article about all the new jobs. I have two children, 44 and 49 who have experienced “age discrimination” (the 49 y/o) and reverse discrimination. The 44 y/o had worked in banking over 20 yrs, never been fired, couldn’t even get an interview because she didn’t speak Spanish (her community is now over 50% Mexican). My 49 y/o son has been in Supply Chain management for 25+ yrs, was laid off over a yr ago, works the internet every day, can’t get an interview and all lower-level jobs won’t consider him because he’s too “overqualified” (Costco, Bucees, Tractor Supply etc.). He’s working hard to find something, even landscaping – same answer, “too overqualified, we’d train you and lose you”.
At this stage of the economic cycle I would encourage millennials to keep a large percentage of liquid assets (cash). When the market next tanks they will be in a better positions to buy all the distressed assets their boomer parents will unload in a panic.