People of my generation, twenty-somethings or the “millennials” as we are called, are probably the most financially risk-averse generation since the Great Depression. We came of age during the so-called “lost decade” when there were two major stock market crashes: the bursting of the internet bubble in 2000 and the financial crisis of 2008. As a result we tend to be skeptical of investing in stocks and keep a lot of our money in cash.
Patrick O’Shaughnessy, author of a forthcoming book on investing for millennials, wrote a piece recently that looks at the historical data and makes the case that millennials need to get over their fear of stocks. If you invested early and stayed in the market, he shows, even the worst case scenario since the 1920’s is not all that bad:
If you start at age 22, the worst result for a dollar invested was growth to $4.80. This would have happened if you invested at age 22 in 1966 and retired in February 2009 at the exact market bottom of the second worse collapse in the stock market’s history. It also would have included the crash in 2000 and the miserable period for stocks between 1968 and 1982 when the market went nowhere. Even through three tumultuous markets, you’d still have $4.80 for every dollar you invested.
On the other hand the best case scenario is very good:
If you start investing in the stock market in your 20s, there is a chance each dollar ends up being worth much more than the $4.80-worst-case scenario or $18-average. There was one period where each dollar grew to $52 over 40 years. In sharp contrast, the best case over 40 years for bonds and bills was $6.70 and $1.90, respectively.
Of course there is no guarantee that historical patterns of asset returns will repeat. But the period since the 1920’s gives you a pretty good sample with all kinds of conditions including crashes and wars in addition to bull markets.
Investors who were scarred by the Great Depression and stayed on the sidelines missed out on several decades of strong market returns. Already many people in my generation are repeating this mistake as the market has rallied for more than five years since the financial crisis.
Seemingly conservative strategies such as holding on to cash or investing mainly in bonds are not as safe as they may seem. Cash and bonds are eaten away by inflation. Stocks tend to cushion the blow of inflation because stock prices and the prices of the products and services companies sell tend to rise along with inflation. Young investors who have a long time horizon should be willing to risk short-term volatility for the opportunity of long-term gains and inflation protection.
At O’Brien Greene many of our clients are from the baby boomer generation, but in recent years we have expanded our services to the younger generations, especially with the adult children of our clients. A good first step for millennials who are just getting started with investing would be to read Patrick O’Shaughnessy’s article.