If you want to retire comfortably, you need your money to grow throughout your career. But many young investors are scared about investing -- and they're staying away from stocks even in their long-term retirement accounts.
Stock market volatility is never easy to deal with. But it's the price you pay for the long-term growth that stocks have provided. Fortunately, if an up-and-down market scares you too much, some stocks have given shareholders a much less bumpy ride while still having the growth potential you need for the long haul.
Reluctant investors
A recent study from the Employee Benefit Research Institute focused on what members of Generation X -- those between age 30 and 44 -- are doing with their retirement investments. Using data from several brokerage companies and other financial research, the EBRI concluded that Gen-Xers responded to the market meltdown by cutting their allocations to stocks to less than half of their overall portfolios.
That by itself isn't so surprising. But separate reports show that even now, after the stock market has bounced so strongly, Gen X accounts at Fidelity have only about 43% of their money in stocks and stock mutual funds, down from 53% three years ago. Another survey just a few months ago discovered that nearly 20% of Gen X members have no stocks at all in their 401(k) accounts, while almost another 20% have less than half of their money in stocks.
When you think about what young investors have endured in their short careers, it's easier to understand why they don't trust the stock market. Having experienced the tech boom and bust firsthand, Gen-Xers are well-acquainted with both the huge potential rewards and the immense risks that stocks entail. And after going through the biggest bear market in a generation just a few years ago, many are apparently concluding that stocks just aren't worth the risk.
A lack of alternatives
The problem is that unless you can save every penny you'll ever need without investing at all, it's tough to build a viable retirement portfolio without including stocks. Safer fixed-income investments have such low yields right now that they aren't even keeping up with inflation and taxes -- two key obstacles that pose the biggest threats to long-term financial success. Meanwhile, those who put their faith in commodities have seen over the past week just how volatile they can be, with precious metals like silver getting slaughtered and oil prices having fallen more than 10% in two days last week.
So despite their reluctance, most young investors need to have a significant portion of their portfolios in stocks. But that doesn't mean you have to endure gut-wrenching pops and drops every day.
Smoothing out the bumps
Not all stocks have huge volatility. Whether it's because they're in industries that have more stable business conditions or just from a company's particular efforts to keep its stock from getting batted around like a ping-pong ball, some stocks give their shareholders a smoother ride.
But just because a stock's share price chart won't make you carsick doesn't mean it doesn't have good prospects. Looking at the market, I found seven promising stocks that combine relatively low volatility with healthy estimates of strong future growth:
|
Stock |
Beta (Last 5 Years) |
Long-Term Growth Estimates |
|---|---|---|
| Illumina (Nasdaq: ILMN) | 0.50 | 24.8% |
| Church & Dwight (NYSE: CHD) | 0.42 | 11.3% |
| American Water Works (NYSE: AWK) | 0.38 | 10.4% |
| Edwards Lifesciences (NYSE: EW) | 0.49 | 27.9% |
| Stericycle (Nasdaq: SRCL) | 0.26 | 16.3% |
| Compass Minerals (NYSE: CMP) | 0.29 | 11.7% |
| LabCorp (NYSE: LH) | 0.50 | 12.0% |
Source: Capital IQ, a division of Standard and Poor's.
You'll notice that a good number of these companies come from the health-care field. Because health-care stocks have been out of favor for a long time, both during the market meltdown and in the ensuing rally, their shares haven't moved as much as the overall market. But favorable demographic trends and increased demand aren't changing anytime soon, giving long-term investors a nice entry point in a promising field. In addition, there'll always be a need for other necessities like water and natural resources, making stocks like American Water Works and Compass Minerals worth a closer look as well.
Face your fear
Investing in stocks does involve risk, and with so many people having gotten burned lately, being reluctant to invest is a common-sense reaction. But to retire rich, you need to overcome your fear. Stocks that make investing a little less scary can be exactly the right answer.
Learn all the basics of financial planning with our 13 Steps to Investing Foolishly. It'll get you on track to a great financial plan in no time.
