A decade after the economic collapse, a new generation of investors are still feeling its impact.
Despite having been mainly on the sidelines during the peak of the financial crisis, 82 percent of millennials say their investment decisions are influenced by it, according to a recent Legg Mason survey. An even larger share — 85 percent — say they invest conservatively, making millennials the most risk-averse generation of investors.
Their portfolios may suffer for it.
“A lack of desire to take on risk has many investors believing they should protect their savings by using safe investments, such as cash or bonds,” says Thomas Walsh, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Atlanta.
While cash or bonds are less volatile than stocks, millennials are trading safety for lower returns and potentially shortchanging their retirement, Walsh says. What millennials fail to realize is that time is on their side.
[See: The Top 10 Investment Portfolio for Millennials.]
Kathryn Lyons, senior portfolio manager at U.S. Bank Private Wealth Management in Minneapolis, says younger investors focus too much on their willingness to take on risk instead of their ability to do so. Millennials, she says, have “the best ability to manage risk because they have more time to invest and let their investments grow.”
Rather than allowing the ghosts of the financial crisis haunt their investment decisions, millennials must overcome their fears.
Embrace market cycles. What’s helping to drive those fears? The misconceptions many millennials have about the market.
Investors often match their behavior to the experience, says Jon Blumenthal, managing director at United Capital in Dallas. He draws parallels between millennials and another market-skittish generation that came of age during the Great Depression.
But “taking risks may be rewarded over time,” Blumenthal says.
Recognizing that the market moves in cycles that often mirror the business cycle also would go a long way toward allaying anxiety over investing.
“Historically, when the stock market goes into a bear market, it’s because we’re in a recession,” says Dave Geibel, senior vice president and managing director at Univest Wealth Management in King of Prussia, Pennsylvania. “This is a natural part of the business cycle — the economy builds, then something happens and the economy corrects itself.”
Geibel says investing is a journey of peaks and valleys, and that younger investors shouldn’t pigeonhole themselves based on past events.
Accepting that the market periodically swings widely could ease fears and curb emotional decision-making. As your mindset shifts, your risk tolerance may shift along with it.
Ken Heise, a financial advisor with Heise Advisory Group in St. Louis, says a down market can benefit younger investors.
When stock prices drop, that’s the time to buy, Heise says. Rather than fearing market cycles, millennials “should seize the opportunity and turn it into an advantage.”
Smooth out the roller-coaster ride. Learning to manage risk will help millennials brave the ups and downs of the market. A diversified portfolio, Heise says, can “smooth out the roller-coaster” ride, easing investor anxiety.
Mutual funds and exchange-traded funds let investors sample the market with less risk than individual stocks, and cost-efficient funds can be an inexpensive way to diversify across asset classes.
Stephanie McElheny, a certified financial planner and manager of financial planning for PNC Investments in Pittsburgh, says target-date funds may be a suitable choice for millennials.
With target-date funds, your asset allocation is based on your expected retirement date. The underlying investment allocation shifts automatically over time as retirement nears.
Still, target-date funds aren’t the right choice for every millennial, says Rob Austin, director of research at Alight Solutions in Charlotte, North Carolina. “As good as target-date funds are, they assume that everybody of the same age should invest the same way,” Austin says.
[See: 7 Tips for Finding the Best Target-Date Retirement Funds to Buy.]
But millennials aren’t all in the same place financially. Young investors with less debt and more money to invest may benefit more from a managed account.
No matter which path you take, dollar-cost averaging can get you past mental roadblocks. By investing a set amount of money periodically, you can lower the average share cost over time and increase your potential for gains, McElheny says. This can help you avoid the “emotionally driven mistake of buying high and selling low.”
To start small with stocks, try an investing app like Acorns and Stash, which allow micro investments. Just be sure you know what you’re investing in.
“Some investing apps only invest in five or so asset classes,” Heise says. “Someone who’s younger and more conservative will typically want a wide asset allocation model to help smooth out the bumps on Wall Street.”
Mix it up. Like diversification, periodically rebalancing a portfolio ensures that you continue having the right mix of investments based on your age, time horizon and risk tolerance. Rebalancing isn’t just about unloading losing investments, though.
“Periodically selling off portions of your winners is also important, as the strongest performing investments may eventually dominate a portfolio and cause it to be unbalanced with the wrong risk profile,” Blumenthal says.
Millennials should also avoid overexposure to the wrong sectors at the wrong time. For Blumenthal, that means not investing heavily in industries where you already have a significant economic stake. For instance, if you work in tech, a portfolio of tech stocks will likely be susceptible to the same pressures that might prompt your tech employer to lay people off. Diversifying across sectors also gives you the added advantage of investing in industries that perform better at different stages of the economic cycle.
In a recessionary downturn, Lyons says, utilities and grocery stores tend to do well because their products and services are essential. Sectors that rely on disposable income, like restaurants and retail, usually fare better when the economy is strong and growing.
[See: 7 Stocks to Buy When a Recession Hits.]
Making sure you have broad sector representation in your portfolio can help maintain stable returns over time, regardless of the business cycle. Bottom line, “diversification is the key to minimizing risk,” Lyons says.
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The Mental Mistake Hurting Millennial Investors originally appeared on usnews.com
