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Why invest in the stock market? Because it's more dangerous not to. The author is not pictured.
- Why invest in the stock market? Because while past returns can't predict the future, history shows it's more dangerous not to invest. Over a long period of time, the S&P 500 has returned an average of 10% per year.
- Studies show 40% of millennials are not invested in the stock market, and those who participate have less invested than prior generations - meaning they're missing out on gains.
- In the short-term, the stock market can be risky and volatile, but it's usually the right place to invest for long-term goals.
I graduated from college in 2007. Like many other millennials who started their careers at the end of the last decade, my first 401(k) plan account started at the precipice of the worst financial recession in the United States since the Great Depression. For millions of relatively new investors, the stock market crash of 2008 was enough to scare them away from the stock market for good.
This is a bad plan. Putting all of your retirement and other funds into a savings account instead of the stock market can cost you millions of dollars over the course of your career.
While the stock market certainly has risk, it shouldn't be so scary that you avoid it all together.
Millennials are afraid of the stock market
A recent publication from the Federal Reserve in Saint Louis points out that just three in five millennials are invested in the stock market in any way. That means 40% of millennials are missing out. Of those who are invested, balances are much lower than Generation X and other previous generations.
This is a huge problem for those millennials who are missing out. Since the stock market hit bottom, it has come back from the Great Recession and then some. If you skipped out on investing, you missed investing in the longest Bull Market in history. The markets started going up on March 9, 2009 and broke a record of 3,453 days of gains in September 2018. That market is still riding high.
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The stock market is a safe place to invest for long-term goals
One of the biggest reasons people are afraid of the stock market is that they don't understand it. While movies like Wall Street, Boiler Room, and The Wolf of Wall Street make the stock market look fun and sexy, in reality experts say investing should be very boring.
The S&P 500 gives investors an option to buy into 500 of the largest companies in the US with one purchase. If you look at the S&P 500 index over nearly any long period of time, it provides around 10% annual returns.
There are good years and bad years. Volatility definitely exists in the markets. But if you have a goal that is a decade or more away, such as retirement, the stock market is the best place to put your money.
Cash for short-term goals should go into savings
There are situations in which millennials and other investors are smart to avoid the stock market. If the money you want to grow is earmarked for a down payment on a home, for example, you may not have time to ride out stock market fluctuations before you want to buy. For a relatively short-term goal like that, a high-yield savings account is best.
As you get closer to retirement, shifting your investment strategy from one heavy in stocks to one heavier in bonds and other fixed-income investments is generally recommended. If you will need the cash in a few years or less, it definitely should not go in the stock market.
This is why most well-rounded personal finance plans include a mix of stocks, bonds, and cash savings. I have my emergency fund in cash as well as a growing fund to eventually buy an investment property. Most of my family's other assets are invested in a combination of retirement and taxable investment accounts set aside for long term goals. As of today, about 80% of my family's liquid assets are invested in the stock market. The remaining 20% is in cash.
Diverse, long-term investments are typically a safe bet
Yes, the stock market has risk. The key to success in the stock market is a diverse, long-term investment plan that will serve you well no matter what the future holds. For many people, a simple portfolio made up of index funds is perfect. There is no need to pick single stocks or make your investments more complicated.
If you have no idea where to start, consider a target date fund where a professional investment manager chooses a combination of low-cost index funds based on your target retirement age. Investment apps like Acorns and robo-advisors like Betterment and Schwab Intelligent Portfolio are also good options to have your investment picked for you.
Whatever you do, don't ignore the stock market or sit on the sidelines. If you do, you could be costing yourself big when your golden years come around.
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Editorial Note: This content is not provided by Goldman Sachs. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by Goldman Sachs.
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