Yahoo Finance Millennial Investing Amid Political Volatility
Let's face it, investors are a bit unsettled. With Brexit across the pond, and our own political situation here, many are just not sure what to expect next.
While I won't get into what all of this means from a political perspective (there are certainly enough people already doing that), what I will talk about is how to navigate this market volatility, especially for the millennial generation in America.
Millennials should be investing with a decades, not years approach. With rising student loan debt, an uncertain job outlook, and a dwindling prospect of having a solid pension or Social Security income, millennials have been having to face the possibility of a rocky financial future. Increasingly too, the onus is being put more on the individual to make sure they have a solid retirement plan, which is not getting easier.
And it's times like these when the excuse can be made to delay saving for tomorrow and instead pay off your college loans or fund expenses for a friend's wedding.
This behavior is partially fueled by the idea that if domestic or foreign political volatility drag down global markets, money you save now could just be lost. But delaying or completely ignoring your 401(k) or other retirement plan can be a detriment, even in an unpredictable market.
[See: 8 Cheap ETFs That You Won't Regret.]
And if you're part of the millennial generation, you're most likely going to go through a number of these swings, and it's not a reason to avoid saving.
The market drops we've seen, especially after the Brexit vote, have been sharp -- that we know. But these drops can and will happen from time to time, and as we've seen since the Great Recession, markets have rebounded, and this time should be no different.
Political uncertainty will cause volatility, but investing isn't really about avoiding specific instances. In reality, it's more important to invest on a consistent basis, with the goal of putting money away over decades, not just trying to time the market over a few years.
The Dalbar Quantitative Analysis of Investor Behavior (QAIB) is an annual report from research group Dalbar. In short, this study analyzes how average investor returns stack up compared to major market indices.
Here are the numbers for the trailing 20 years, ending on Dec. 31, 2015. These figures include the dot-com bubble and the housing market bust (all returns annualized):
-- Standard & Poor's 500 index 8.19 percent
-- Barclays Aggregate Bond index 5.34 percent
-- Average equity (stock) investor 4.67 percent
-- Average fixed income (bond) investor 0.51 percent
Why do we do this to ourselves? Emotion. What these data show is just how much investor emotion gets in the way of investor success. By taking emotion out of these business decisions (really, the business of you), money can be allocated in a consistent manner, instead of simply reacting to the latest market report.
So what are the emotions that we need to be careful about? Two in particular: fear and greed.
[See: The 9 Best Investors of All Time.]
Fear tends to creep in when the market gets a bit unsettled and investors don't want to take a chance of losing money they worked so hard for. This is exactly what happened with Brexit, and what will happen in other future situations as well. Understand that this can and will happen, and continue to invest consistently.
When discussing greed, investors may experience FOMO, or "fear of missing out." These investors are anxious that if they sit on the sidelines any longer, all of their friends will be getting rich while they were too slow to take action. (What's also interesting here is even on the greed side, there is an element of fear.)
How the market works and why Buffett is successful. But the most interesting thing to examine is how money flows in and out of investments (which is much easier to do after the fact, of course).
Instead of money leaving a underperforming asset, it actually flows into it. That is, specifically when people are trying to jump on the bandwagon. The opposite is also true. When people perceive there to be too much risk, they tend to pull their money out.
Legendary investor Warren Buffett has created a legacy in part based on the idea that investing in certain undervalued companies can be financially beneficial over the long term. This isn't to say that every company that experiences a 15 percent drop in its stock price should be scooped up; other factors can and should come into play in analyzing the opportunity. What it is saying though is that just because a firm's earnings report comes out less than stellar and other investors won't touch it, doesn't mean that it should be completely discounted.
His ability to walk into a situation when everyone else was running out resulted in Buffett being able to find significant bargains, and some huge returns over the long run.
And just because you're not the Oracle of Omaha doesn't mean you can't follow some of the same principles he does. These tenets hold true for any investor.
Compound interest's role. Just about everyone knows that paying interest is something you want to avoid where you can, and earning interest is something that you should be taking advantage of. But when it comes to compound interest, it seems that some may not quite know just how much of a positive impact it can make.
A quick example: Let's say you put $1,000 in a savings account each year for 10 years, earning 5 percent interest annually. At the end of that time period, you'd have earned almost $2,600 in interest. But if you kept saving for another 10 years at the same amount and rate, you would have earned over $13,000 in interest. That is the power of compound interest, and why saving early, despite volatility, is encouraged.
And if you're of the millennial generation, time is a resource that you do have on your side.
Next steps. If you've been delaying funding your 401(k), waiting for when the political landscape will settle down, it's not too late to reverse your course.
[See: 7 Global Goats That Could Bring Market Mayhem.]
Securities offered through SII Investments, Inc. (SII), Member FINRA, SIPC. Advisory Services offered through Scarborough Capital Management (SCM), a Registered Investment Advisor. SII & SCM are separate companies. Neither SII nor SCM provide tax or legal advice. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. Diversification and asset allocation do not guarantee positive results. Loss, including loss of principal may result.
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