Tuesday, September 20, 2011

Young investors shouldn't avoid stock market, its opportunities - STLtoday.com

You can learn a lot from your parents, but when it comes to investing, you may want to be skeptical about mimicking them.

A recent survey of Generation Y shows that many 18- to 30-year-olds have been so unnerved by the savagery of the stock market in the past few years that they are investing as conservatively as their parents and grandparents. These young adults have watched their parents struggle the past few years and are so afraid of the stock market that they are determined to keep their savings safe.

For grandparents, it makes sense to be careful about the stock market. For parents about to retire, moderating stock market exposure is also smart. But people in their 20s who handle money as if they were 50- or 60-year-olds could be making a grave mistake.

Young investors may be playing it so safe with 401(k)s and other retirement savings that they will position themselves for a train wreck. By retirement, they will be far short of money.

According to the MFS Investing Sentiment Survey by the Research Collaborative, 40 percent of Generation Y has concluded, "I will never feel comfortable investing in the stock market."

"Never" is a long time. But if you are among this group and have been warned by parents to stay clear of stocks, this is why you may want to reconsider.

First, it is true that the stock market can be brutal, and you have just witnessed one of the fiercest periods in stock market history. Stocks declined 49 percent in 2000-2001; then, just as your parents recovered what they lost during that horrible bear market, the financial crisis arrived late in 2007 and destroyed 57 percent.

You may have heard your parents curse stocks and mourn the losses in their 401(k)s. Their stress may have been intensified by the worst job market of their lifetime or a home plunging in value.

Boomers went through much of their adulthood believing the stock market was a sure thing. In the 1980s, it delivered gains of 17.6 percent a year on average, according to Ibbotson data. In the '90s, it was 18.2 percent. As boomers approached retirement, one in four had 90 percent of their 401(k) money invested in stocks, a dangerous amount for someone close to retirement but not necessarily for someone with 40 or 50 years of saving ahead of them.

A central theme in investing is to select a mixture of stocks and bonds based on how close you are to retirement. At your parents' age, you must be cautious, perhaps investing no more than 40 or 50 percent of retirement money in stocks so a loss doesn't hit you just before you retire.

But in your 20s, you are likely to enjoy plenty of good years in the stock market if you keep adding a little money from each paycheck to your 401(k) or an IRA. Though you could suffer losses in the current rough period, over many years your early deposits in stock mutual funds in a 401(k) or IRA are likely to grow well. Historically, despite the awful periods in the market, stocks have gained 9.9 percent on average annually since 1926, and bonds have gained 5.5 percent, according to Ibbotson.

A look back at history may provide courage. During the Great Depression, stocks crashed hard. The market dropped 86 percent and took more than 15 years to recover. It was a disaster for many people near retirement. An investor who put $10,000 into the stock market just before the crash had just $6,000 10 years later. But if you had been 25 years old and invested $10,000 in the stock market just before the crash, you would have had about $210,340 at retirement 40 years later. Time is on your side if you invest in stocks. You are investing in the long-term growth of the economy.

But you may say: Why take the chance?

You wouldn't have to if you were willing to save huge portions of your pay every year. But most people can't stash enough into a savings account or safe U.S. bonds. Let's say you are 30, you save $5,000 a year and earn the historical averages on your investments until retirement. In a savings account, you would accumulate about $247,000 by the time you retire. In Treasury bonds, you would have about $720,600, and in stocks, $2.3 million. If you divided your money half in stocks and half in bonds, you would have about $1.5 million.

Perhaps $720,600 sounds like plenty to you. But remember, inflation requires you to have much more money in the future than you would today for a comparable standard of living. If you are used to living on $50,000 a year at age 30, you might need about $114,000 a year by retirement.

Try http://www.calcxml.com/calculators/ret05?sknequalsresults.


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