Most Millennials Aren’t Investing in Stocks

According to several recent Harris polls, most millennials aren’t investing in stocks. In some polls I have seen, around 80% of millennials aren’t invested at all in the stock market. For most, this will be a huge mistake. I acknowledge that some have a large amount of student debt, credit cards debt, or other liabilities. However, if they look around hard enough, they could probably save at least $100 per month to put into a stock market index fund. $100 per month into an index fund certainly isn’t going to make anyone wealthy, although it beats the alternative, which is having zero investments. If they contributed $100 per month for 40 years into an index fund that averaged a 7% compounded return per year, they would at least have ~$250,000 at the end of 40 years. Adjusted for inflation, this is not as much as it sounds like today, nor will that alone provide a comfortable retirement. But at least it’s a start. Add in a 401k from work or some form of individual retirement account (IRA) and they would hopefully have at least a decent retirement. By choosing not to save and invest into productive assets when they are young, they are making a huge mistake that will likely jeopardize their future.

One reason some millennials aren’t investing in stocks is they fear another 2008-2009 stock market crash of 50%+. Some millennials don’t trust the stock market, even though it has averaged 10% annual returns for over 100 years, but of course with many ups and downs. If you are young and have many decades left until you retire, you should being doing back flips and be EXCITED about a stock market crash. Yes, your current funds will decline precipitously, but if you are continuing to invest, and you reinvest your dividends, lower prices are your friend, and will accelerate the wealth building process over time. Most millennials have a hard time understanding this. If you want higher returns, you need lower valuations. Would you rather buy the S & P index at 10x earnings and a 4% dividend yield or at 20x earnings and a 2% dividend yield? Which would lead to better results assuming 6% earnings growth for both? Yet most people can’t seem to hit the sell button fast enough when stocks start to get cheap. What would happen at the shopping mall if all merchandise was 50% off? For one, getting a parking space would be near impossible. People would be falling all over themselves to buy something. What would happen if you lived in a $300,000 house and someone showed up on your doorstep and offered you $150,000 to buy it? Most people would laugh at the person and then slam the door. Yet in the stock market, when stocks get cheap people want to get rid of them as quickly as possible. Stock market declines shouldn’t be feared by millennials, they should be embraced. For someone who is older and is liquidating their portfolio to meet living expenses, I understand that market crashes aren’t fun. The key to that situation is to not have too much invested in equities, and maintaining some exposure to bonds and cash.

Another reason most millennials don’t invest in stocks is that they are really lacking in financial education. Most millennials, despite having a college education don’t understand basic financial concepts such compound interest or inflation. Many of them put what little money they have saved in a savings or checking account. This can make sense if they have short-term needs for the money such as a down payment on a house, although I would prioritize investing before purchasing a home. It would take a very large salary over many years, combined with a high savings rate, to ever accumulate a large sum of money in a savings account. Even then, the opportunity cost would be extraordinary, as the amount of future wealth lost by such a strategy would be staggering. When people talk about risk, sometimes the biggest risk of all isn’t taking one. By leaving money in a savings account for many years, millennials are guaranteeing they will lose money, not in a nominal sense but after accounting for inflation. If your money is compounding at 2% or less per year and inflation runs at 3%, you will have less purchasing power in the future even if you have slightly more money in your account than when you started. If millennials would just understand this concept, I believe they would prioritize investing in productive assets.

Another reason some millennials aren’t investing is that they have no ability to delay gratification. They want everything right now. I can somewhat understand this. Growing up with cellphones and google searches certainly reduces waiting time. With phones these days, almost anything someone needs is at his or her fingertips. Unfortunately with investing, delayed gratification is a required trait. If someone wants to speculate he or she could get some instant gratification through day trading, but if most people attempt that, they will likely lose everything.

For example, I remember reading and article about the Facebook IPO in May of 2012. Obviously, most millennials are very familiar with Facebook. The article profiled a few young people that decided to buy the stock at the IPO. However, those people didn’t even know where Facebook’s revenues came from or how the company was going to make money, or if it even made money.  They never bothered to learn or think about how the company was valued. They bought the stock thinking they would make some large, quick and easy profits. They were gambling without knowing it, not investing. At the IPO it was priced somewhere around $40 per share and quickly went lower. In August of 2012, three months later, it made its way down to ~$19 per share. Most of the people ended up selling at a loss a few days after the IPO. I read quotes such as “the stock market is rigged”. Or “It was a scam, so I washed my hands of it”. Or “I’ll never invest in stocks again, it’s too risky.” However, had they bought at the original price of $40 per share and held until today, they would have made a little over four times their money in a little over six years. That’s a compounded return of roughly 24% per year. Because of their need for immediate profits and instant gratification, as well as not knowing what they were doing, they sold at a loss and cost themselves A LOT of future wealth. Not only did they not quadruple their money as of today, they likely cost themselves a lot more wealth as Facebook has a decent chance of growing well into the future, current issues not withstanding.

Some young people choose not to invest in stocks because they invest in real estate or maybe they have their own business and choose to invest in growing the business. Both of those options are very viable. Young people don’t have to own stocks at all to grow wealthy and have a comfortable retirement. This article was intended to help people invest that either aren’t investing due to fear, ignorance, or don’t believe they have enough money to invest. Even small amounts of money in the can lead to big amounts if invested wisely and consistently, and given enough time. If you have no idea how to invest, start with an S&P index fund and try to contribute as much as you can. Over time, it will add up and you should stand a great chance of having a comfortable retirement. It certainly beats a savings account, or gambling on the latest fad.

 

Leave a Reply

Your email address will not be published. Required fields are marked *