When it comes to investing, risk and reward tend to go hand in hand. And while it's natural to fear the stock market, keeping your money in safer investments could really stunt your savings' growth.
But while older investors may be hesitant to put their money in stocks, younger investors who have time to ride out the market's ups and downs should be more prepared to dive in. Yet a surprising number of millennials aren't biting. A 2016 Harris Poll found that nearly 80% of younger investors don't have stocks in their portfolios. And according to NerdWallet, 63% of 18- to 34-year-olds are stashing their nest eggs in a regular old savings account, as opposed to investing that money and growing it into something bigger.
Now most folks are aware that sticking to safe investments will limit their returns, but if you're a younger investor, you may be in for a shock. NerdWallet ran some numbers to see how much millennial investors stand to lose by avoiding the stock market, and the result is a whopping $3.3 million.
That's right. If you're an investor in your 20s, and you keep your money in savings rather than put it in stocks, you stand to lose $3.3 million in potential results in your lifetime. And that's enough to make anyone rethink that strategy.
How much money are you willing to give up?
Some folks are more naturally risk-averse than others. But if your fear of losing money causes you to avoid the stock market, your nest egg might suffer. Tremendously.
NerdWallet reviewed stock market and interest-rate data from the past 40 years to figure out how much a 25-year-old today saving 15% of a $40,456 salary (the median income for that age) might accumulate by investing in stocks versus keeping that money in a savings account. Assuming the next 40 years mimic recent historical averages, leaving $6,068.40 a year (15% of $40,456) in a savings account over four decades will result in an ending balance of roughly $1.27 million. On the other hand, putting that same sum into stocks will result in a far more impressive $4.57 million. All told, young investors who play it too safe stand to lose well over $3 million, which could make or break one's retirement.
Of course, NerdWallet's methodology isn't perfect. Those numbers assume that savers will be investing 100% of their set aside income in the stock market, which is fairly unrealistic. As a general rule of thumb, savers in their 20s should have 80% to 85% of their portfolio in stocks -- but that 100% target is fairly aggressive even for younger workers with time on their side. But even if we account for that discrepancy, millennial savers still stand to lose millions by taking too conservative an approach to building their nest eggs.
Don't fear the stock market
If your tolerance for risk is mediocre at best, the idea of filtering most of your hard-earned savings into the stock market might seem rather daunting. But here's the thing about the stock market: Investors who are in it for the long haul have a strong tendency to come out ahead. Between 1965 and 2015, the S&P 500 underwent 27 distinct corrections where stock values fell 10% or more, yet it ultimately recovered from each and every one during that 50-year period. What this means is that investors who were willing to ride out those corrections ultimately made money, even if their portfolios took temporary dips along the way.
Another thing to realize is that you don't need to take on the risk of individual stocks to get a piece of the action. If you load up your portfolio with exchange-traded funds, or ETFs, your investments' performance will mirror that of the market on a whole, so when conditions are good, you'll benefit. Furthermore, because ETFs offer instant diversification, you'll get a bit of protection that doesn't always come with individual stock investments. If you're new to investing and are interested in ETFs, check out this roundup from my colleague Matthew Frankel.
While sticking your money in a guaranteed savings account might help you sleep better at night, avoiding the stock market could seriously compromise your nest egg and take your retirement down with it. That holds true whether you're an investor in your 20s, 30s, 40s, or 50s. As long as you have at least seven years to work with, you should take whatever money you're not using immediately and put it into the stock market. Though you'll be taking on a bit of risk, what you stand to gain is more than enough to compensate.
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