Investing

Millennials are planning to take more risks when it comes to investing


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The annual Legg Mason Global Investor Survey (GIS) does not lie:
Americans of all age groups are not saving enough for retirement,
and by less than half of what they say they will need to live
comfortably. Scary stuff. 

As investment professionals, it is not our job to tell people to
save more of their hard-earned money (although saving is the
ultimate investment hedge) but to help them invest that money. We
have all learned the hard way that time in – rather than timing –
the markets is what drives the majority of returns. 

One age group can take ample advantage of enlightened investing:
Millennials. But will they?

Millennials (or Generation Y) are those born between 1980 and
1997. With decades-long time horizons ahead of them, Millennials
can benefit most from the miracle of compounding, and the
long-term growth potential of equity investments. The average
25-year-old will probably work another 45 years before retiring,
70 (or more) being their anticipated norm. 

They are surprisingly risk-averse, although in finance there is
risk in not taking on enough risk. In a Brookings Institution
survey, 52 percent aged 21 to 36 reported keeping their savings
in cash, versus 23 percent for savers of other ages. Their
conservatism stems from bad experience with the Financial Crisis
of 2008/2009; while too young to be invested, they watched their
parents and grandparents lose enough (and never recover if they
went to cash) that it put them off moving what funds they now
have into financial markets. 

Their retirement savings goals also may be too low: an Employee
Benefit Research survey reports that two-thirds of Americans
believe they can comfortably retire with $1 million or less; the
other one-third say they can manage with less than $500,000.
(This is in addition to Social Security.) Yet for most
Millennials, less than $1 million is unlikely to be enough to
live well. 

Conservative estimates project that inflation will run between
2.5 and 3 percent per year. Equity returns have historically
outpaced inflation; cash has not. Millennials must also account
for other risks, such as education inflation (6-9 percent over
last 20 years), health care inflation (2.6-5.2 percent over last
10 years), and longevity risk – the risk of outliving their
assets in retirement. 

Yet now, according to the Legg Mason GIS, 78 percent of
Millennials say they plan to take on more risk. This is probably
driven by strong returns in equity markets over the last nine
years, as well as this generation’s tendency toward FOMO (Fear Of
Missing Out). If they rush to invest in growth – in particular,
high-risk assets at market highs – they risk buying high, and
selling low. 

The U.S. equity markets have had a great bull run, but they
cannot keep going up forever. If history is any guide, at some
point over the next five years, stocks are liable to drop 10
percent, or more. Markets may stay down for a while, unlike 1Q
2016, when they bounced back quickly. 

When the inevitable reversals come, we should emphasize patience
but also help them prepare in advance through more outcome
oriented asset allocation.

Patience:  As this chart illustrates, since 1931, whenever
the U.S. Stock Exchange experienced a sharp drop, it
rebounded. 


image001QS Investors

Staying in the markets, even during difficult times, has always
paid off over the long term for American investors. Chasing
returns and going to cash to time the market rarely works. The
all-too-human urge to sell during drawdowns – because not knowing
the outcome inspires fear of disaster through inaction – can be
overwhelming. Investing requires confidence, and patience. 

Asset allocation:  Diversification also helps. Steering away
from market capitalization indexed products to mutual funds and
exchange traded funds that seek to minimize market volatility and
downside risks can be good choices.  By investing in
products that employ time proven principles such as investing in
stocks with low price and earnings volatility and high
sustainable dividends – the types of characteristics that help
stocks hold up during market storms – investors will be more
likely to stay in course.  

The decisions Millennials make today about investing, and their
experiences over the next 10 years, are likely to affect how they
invest for the rest of their lives. This will make material
impacts on their ability to reach their life goals: save to
purchase a home, fund college education for their children, cover
health care costs, and fund a decent retirement lifestyle. 

Our job is to set them on the road to successful investing – now,
while they can make full use of the advantages of youth. 

James Norman is President of QS Investors, a Legg Mason
affiliate, His opinions are not meant to be viewed as investment
advice or a solicitation for investment.

Diversification does not assure a profit or protect against a
loss

Equity securities are subject to price fluctuation and
possible loss of principal.

Any information, statement or opinion set forth herein is
general in nature, is not directed to or based on the financial
situation or needs of any particular investor, and does not
constitute, and should not be construed as, investment advice,
forecast of future events, a guarantee of future results, or a
recommendation with respect to any particular security or
investment strategy or type of retirement account. Investors
seeking financial advice regarding the appropriateness of
investing in any securities or investment strategies should
consult their financial professional.

Read the original article on Legg Mason. Legg Mason is a global asset management firm providing active asset management in many major investment centers throughout the world. Visit www.leggmason.com to learn more. Copyright 2017. Follow Legg Mason on Twitter.

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