The risk of being too conservative with your investments
Some people don't like the stock market. Confidence waned since the 2008-2009 Financial Crisis with fewer people participating^1 in the stock market since before the crisis. Yale University has reduced its domestic stock allocation to 3% in favor of venture capital and other private placements^2. Those who lacked the gull to go back into the market missed out on a 200% increase in the S&P 500 since the 2009 bottom. Yale's decision to allocate away from publicly traded stocks aren't in a vacuum. Millennials have preferred cash and alternative investments over stocks. “2% of Millennials are investing conservatively, compared with 38% of Generation X investors and 23% of baby boomers, according to the Fidelity survey. Millennials held 25% of their investments in cash, compared to 19% of investors overall, according to a Charles Schwab & Co. study of client data.”^3 Here's why their investment approach is misguided and why it's necessary to accept the risk and buy stocks.
Low inflation has kept the Federal Reserve from raising rates significantly. Last week, Fed Chair Jay Powell, announced no further adjustments to the short-term interest rate. Recently dining with President Trump, he confirmed that their assessments are only based on empirical data and not as a reaction to Trump’s insistence on further stock market stimulus in the form of keeping rates low.^4 Regardless of the rationale, low rates will give another boost to equities.
Time horizon is the most important part of determining investment risk. For millennials, knowing that money saved in a 401(k), IRA, etc., won’t be available for distributions until after the age of 59.5, this leaves a lot of time for a recovery after a potential market correction.
At Eureka Wealth Management, I help identify the potential reward for a certain level of risk by weighing stocks, bonds, and other investments. I also provide financial planning and advice on retirement, insurance, tax & estate strategies. Call for a free initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
^4: Financial Times 2/6/19: “Fed’s Powell uses White House dinner to restate impartiality.”