Risky Business: Why Younger Investors Should Take Risks in Their Portfolio

Millennials began their careers around the 2008-2009 downturn and are understandably gun-shy around stocks. They saw their parents’ losses and want to avoid having the same thing happen to them. As a result, most millennial investors are opting for the security of large cash positions or more conservative portfolios to make sure they don’t experience large losses.

Younger investors with longer timelines to retirement (typically 30-40 years) are generally encouraged to take more risk in their portfolios since they have plenty of time to recover from market downturns. As timelines decrease, the general recommendation is to increase exposure to more conservative investments (such as fixed income) to protect your balance from excessive market volatility.

In our last post, we discussed how behavior affects your retirement account balance more than investment performance does. Performance is important, but without sufficient contributions to back it up, you won’t get  where you want to be. Once you are maximizing your retirement savings, you need to position your investment portfolio for long-term growth. In other words, make sure you’re taking enough investment risk to grow your contributions over longer time periods.

US News and World Report recently said the secret to long-term growth is to ignore the “noise” from media outlets and short-term market fluctuations. Looking past the irony of a media outlet instructing us to ignore media outlets, what they are saying is true. Investors need to keep their emotions out of investing decisions. Reacting to market movements based on fear is a sure-fire way to accomplish the opposite of what you set out to do.

Younger investors (all investors, really) need to understand one simple investing rule: the higher the market risk in their portfolios, the higher the potential for growth. Historically, long-term investments have generated positive performance with little to no impact from short-term market fluctuations.[1] While money market funds and other cash equivalents might seem safe now, relying on them to grow your retirement account is not recommended. While they may help you avoid a few headaches in the short-term, the amount of money waiting for you when you reach retirement may not be enough to carry you through. This is the main reason we turn to the stock market to save for retirement.

The chart below shows the growth of a $100 investment–one in a cash account and the other in a global stock portfolio–invested from January 1, 1995, to December 31, 2014.

DISCLOSURE: The Global Stock Portfolio is represented by the MSCI World Index (net dividends) and the Cash Portfolio is represented by the One-Month US T-Bill. Example assumes reinvestment of dividends and income. Past performance is not indicative of future results.

And that’s just over 20 years. You can imagine what a difference another 10 or 20 years might make on the ending value of your account. Also, this example didn’t even factor in ongoing contributions.

Millennials and others with longer investment timelines should take risks based on their overall income goals and length of time to invest. If you want to be a conservative investor, then you need to seriously consider increasing your level of contributions to meet your retirement income goals. The increased contributions will offset the lack of growth from the market over time.

Planning for retirement takes discipline and the ability to look past short-term events while focusing on long-term goals. We encourage all plan participants to review their accounts with their plan’s financial advisor (or their personal advisor or financial planner if they have one) to make sure they are positioned for the best possible outcome in retirement. The combination of amount saved and investment mix will determine your retirement income.

 

[1] Past performance is not indicative of future results.

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McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.

The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. MAMC is a SEC registered investment adviser. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance.

The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.