If someone offered you an opportunity to triple the money you're currently saving, with no strings or risk attached, would you take it? Probably -- you'd be a fool not to. But what if that offer were a bit more loaded? What if you could grow your money significantly, but with the knowledge that you might lose out on some of it if circumstances happened to align in the worst possible way?
That's the conundrum so many savers face with regard to the stock market.
Historically, the stock market has delivered consistently higher returns than safer investments like bonds and traditional savings accounts. Yet the stock market is also much more volatile, and as such, countless savers are opting to avoid it completely.
And there lies the problem: While it's one thing for an older investor in their late 50s or 60s to stay away from stocks, it's another for younger folks to act similarly. Yet according to new research by LendEDU, 41% of millennials are avoiding the stock market and are instead storing their retirement cash in regular old savings accounts. The result? Younger savers are losing out on more than $3.46 million over a 38-year period. And that's just ridiculous.
Why millennials are staying away
It's not that younger savers want to miss a key opportunity to grow their wealth; it's that the stock market scares them senseless. In fact, 58% identify as being afraid of the stock market, while 52% point to the 2007-2008 financial crisis as a reason to stay away.
But here's why that line of thinking is rather skewed. First of all, the 2007-2008 crisis represented an extreme situation, and while a similar event could very well happen again, those who sat tight when the market tanked, generally speaking, came away unscathed. It was those who cashed out their investments who lost countless amounts of money.
The same holds true when it comes to stock market corrections, which are far more common than all-out crashes. Between 1965 and 2015, the S&P 500 underwent 27 corrections in which stock values fell 10% or more, but guess what? It wound up recovering from each and every one. In other words, if you act hastily and pull out of the stock market the second it starts to dip, then yes, you'll probably lose money -- in which case you may actually be better off sticking your cash in a savings account, collecting whatever meager amount of interest you get, and hoping it suffices for retirement purposes (it won't). But if you're willing to ride out the market's ups and downs, you're more likely to come out ahead than not.
And that's why younger investors should be the last people to fear the stock market -- because they have plenty of time on their side to see the market through its good periods and bad. In fact, I like to say that as a general rule, if you have money on hand that you don't expect to use for seven years or more, it pays to put it in the stock market. Is the stock market the right place for your emergency savings? Absolutely not. But if there's no near-term need for your cash, you might as well put it to good use.
Here's another point to consider: Avoiding the stock market doesn't just mean giving up potential gains; it means putting your retirement at risk. A savings account won't even come close to keeping pace with inflation, at least not at today's rates. If you don't grow your money more efficiently, you're likely to struggle when retirement rolls around.
A safer way to invest
Clearly, I'm a pretty big advocate of the stock market, but that isn't to say that you should just throw some money into a brokerage account, choose a bunch of stocks at random, and cross your fingers. If you're going to invest in stocks, you'll need to learn the basics, do your research, and choose strong companies that align with your strategy.
Don't have time for all that? No problem. Rather than buy individual stocks, put your money into exchange-traded funds (ETFs). ETFs aim to match existing indexes, so that their performance is frequently linked to that of the market on a whole. ETFs offer instant diversification and tend to charge very low fees, so if you'd rather not strain your brain in an effort to load up your portfolio, forgo those individual stocks for now and focus on ETFs instead.
No matter what specific investment strategy you employ, if you're a younger saver, you'll be doing yourself a major disservice by staying away from stocks. Though you'll take on a degree of risk, if you play your cards right, the payoff will more than make up for it.
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