By Xavier Brenner Millennials are often portrayed by the media as carefree, entitled, social-media addicts. Yet when it comes to investing, these young adults (often classified as people ages 21-36) are actually the most fiscally conservative generation since the Great Depression, according to a report by UBS Wealth Management Americas. They're ultra-conservative about stocks and have more than half of their financial assets wrapped up in cash, certificates of deposits and multi-money market funds, UBS data show. It's understandable that Millennials are wary of the stock market and investment risk in general after watching their parent's portfolios get whacked by two crashes over the past 15 years. However, when it comes to investing in the stock market, time is perhaps investors' greatest ally. Of course, there will be corrections along the way. But over the long haul, history has shown that investing early and often can be a great way to build wealth, especially with compounding returns. Waiting even 10 years can have a dramatic impact on lifetime returns. Patrick O'Shaughnessy, a Principal and Portfolio Manager at O'Shaughnessy Asset Management, has a useful post on Millennials' investing phobia. On the one hand, the aversion to investing in riskier assets makes sense. After all, Millennials have lived through the tech crash in 2000, the global financial crisis of 2008 and the subsequent Great Recession. The last time you had two big market blowouts in the same decade was the 1930s. Even so, O'Shaughnessy says young people are missing something essential about risk and a lot of potential wealth. As he points out:
"The problem is that we tend to think of 'risk' as a fixed concept—that is, stocks are riskier than cash and bonds…period. But risk can only be accurately assessed in combination with a time horizon.
If you are 25 and saving for retirement, you have at least a 40 year time horizon, which drastically changes what is risky and what is safe. Millennials are making decisions as if they were 60 years old, on the verge of retirement—and it could cost them huge amounts of wealth."O'Shaughnessy went back to 1920 and calculated the average real growth of stocks and then looked at different time horizons of investing based on age. Not surprisingly, investors who start out in their 20s have time to weather the downturns and come out way ahead of older investing groups.
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