Millennials are still terrified of stocks.
The market may have rebounded from the Great Recession lows, but millennials confidence in the investing process hasn't. Millennials invest less than 30% of their wealth in the stock market, according to a Deloitte Touche Tohmatsu Limited study. Here are three reasons why millennials are still suspicious of the stock market.
They Were Scarred By the Financial Crisis
Millennials came of age at the turn of the century - and during the worst financial crisis since the Great Depression.
"Just as Depression-era folks have certain money relationship characteristics that were formed based on their experiences, so do millennials," Egan, Berger & Weiner, LLC certified financial planner Howard Pressman told TheStreet. "I once spoke with a young couple about investing and they told me that they didn't want anything in stocks. The husband told me that his grandfather had lost everything during the 2008 crisis. Me telling him that it wasn't the market's fault wasn't going to help. Grandpa should never have been invested so aggressively that losing it all was a risk."
Millennials who still have decades before retirement shouldn't let "emotional responses" to market swings motivate their investment decisions, Pressman said. Investing now with a diverse portfolio will give their savings the opportunity to compound over time, while insulating them from market swings.
Learn from grandpa's mistakes.
Their Parents Overemphasized Saving
Millennials weren't the only ones traumatized by 2008. Their parents were as well, and started drilling the importance of saving into the minds of their kids.
"What the Great Recession did is forced people to talk about money," certified financial planner and PNC Investments senior vice president Rich Ramassini says. "Either way, the conversation that parents were having was 'because we have saved we can withstand this volatility' or 'we didn't do this and that's why dad's taking the bus to work or we're moving to a smaller house.'"
Millennials tend to keep 25% of their retirement savings in cash according to a Charles Schwab & Co. study of client data, compared to 19% for the average investor. Risk-averse 20-somethings shouldn't rely too heavily on cash though according to Ramassini, as cash doesn't have the potential to keep step with inflation like stocks.
They Have a Ton of Debt
A lot of millennials think they are too far in debt to enter the stock market, but Harvest Advisors certified financial planner Monica Dwyer warns that it would be a mistake to let student loans distract from building an investment portfolio.
"Work to pay down debt but not necessarily at the cost of putting money aside for retirement or other financial goals," Dwyer explains. "If you are paying off low interest debt from student loans, spread that out over time."
Time is an investor's greatest advantage in the stock market, Dwyer says, and cautions millennials against spending the first half of their careers "waiting on the sidelines" of the stock market until they are debt free. Wait too long, and you may be watching companies such as Apple (AAPL) and Amazon (AMZN) surge beyond a $1 trillion valuation.
"Slow and steady is the name of the game," says Dwyer.
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