Why Young Investors Should Start Saving Early and Invest in Equities By: William Walsh

Some young investors believe if they begin saving as much as they can they’ll have plenty of money when it comes time to retire. That’s a good start, but many of today’s youngest investors are at risk of not having enough assets at retirement because they are not starting to save early enough, or are too conservative with their investments.

THE CHALLENGE OF GETTING FROM HERE TO THERE 
A study by Prudential found that millennials, investors in their 20s and early 30s, expect to retire at age 67 and will need about $1 million to fund their retirement.1 Yet there seems to be a disconnect between how much these investors say they’ll need to retire and how they’re going about achieving it. 

Most troubling, according to the survey, is that more than 40 percent of millennials are not saving for retirement at all. This generation, which has been hit hard by heavy student loan debt and reduced incomes due to lackluster employment and economic conditions, has been hard pressed to set aside the assets they’ll need to meet their retirement goals. And those who have started saving may not be making the most advantageous investment choices. Younger investors might learn a thing or two from retirees who, not surprisingly, advise to start saving early and put away more. Nearly 20 percent of retirees surveyed also wished they had invested more aggressively.

ARE MILLENNIALS TOO RISK AVERSE? 
Whether turned off by the financial crisis of 2008 or lacking an understanding of the long-term track record of stock investments, many young investors tend to be risk averse and sensitive to market volatility. In fact, a survey from Accenture found that 43 percent of millennial respondents described themselves as “conservative” investors, compared with just 31 percent of baby-boom respondents.

But if younger investors hope to reach their retirement savings goals, most of them will have to begin tilting their portfolios more heavily toward equities. Millennials invested through their employer-sponsored retirement plans may be headed in the right direction. These investors have about 75 percent equity exposure in their workplace retirement plans4, but some experts say this is still too low. 

TIME IS ON THEIR SIDE 
Since young investors have the benefit of 30-plus years until retirement, they shouldn’t be as concerned with equity market volatility. “Equities have historically outperformed bonds and have generated strong returns over rolling 30-year periods. Plus, the average equity return is double that of the average bond return,” says Michael Rosenberg, head of Investment Only Defined Contribution (IODC) Distribution at Prudential Investments. Even going back to 1926, the lowest 30-year equity market return was still very competitive at 8.5%, and in line with the highest bond market return period. 

When your investment horizon stretches well into the future as it does for millennials, equity market fluctuations can work in your favor. “In the end,” says Mr. Rosenberg, “as long as an investor keeps making contributions, the growth in a stock portfolio can be substantial compared with bonds, regardless of market conditions, due to the benefits of dollar cost averaging and the compounding of returns.”


TAKING THE EMOTION OUT OF INVESTING 
“It’s not surprising that many millennials are investing too conservatively,” said Jeremy Stempien, product specialist on Quantitative Management Associates’ (QMA) asset allocation team. “They tend to make investment decisions based on emotions and experiences rather than their actual capacity or ability to take on risk.” 

One way to address this situation is to allow professionals to assume the role of allocating assets. Target date funds aim to accomplish just that. “Target date funds can potentially help bridge the gap between the willingness and ability of young investors to take on risk,” noted Mr. Stempien. “A target date fund automatically adjusts the asset mix for an investor. They’re heavily weighted towards stocks early in the investor’s life when he or she has the capacity to take on more risk, and they become more conservative as the investor approaches retirement.” 

“Millennials face significant financial challenges,” says Mr. Rosenberg. “But they have the advantage of time on their side and by starting now, saving more—and allocating a higher percentage to equities early on—they stand a better chance of accumulating the assets they’ll need for retirement.” 

DEFINITIONS 

Dollar cost averaging is the investing technique of purchasing an investment on a regular basis, regardless of price, enabling an investor to purchase more shares when prices are low, and fewer shares when prices are high. 

Ibbotson US Intermediate Gov’t Bond Index is an unweighted index which measures the performance of five-year maturity US Treasury Bonds. 

Ibbotson US Large Stock Index is an unweighted index which measures the performance of large cap stocks 

1&2Prudential: Financial Literacy and Retirement Readiness Study. 2014.
3Accenture: Generation D: An emerging and important investor segment. 2013.
4EBRI: 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013.

William P. Walsh

Bill Walsh, Vice President, Regional Sales Director of Prudential Financial, is well-versed in all retirement markets and has extensive experience working with corporate, non-profit, and governmental organizations. He recognizes the importance of aligning retirement-plan initiatives with overall client...

More about William Walsh
Sign up for our Newsletter

More Articles From This Issue

Sign up for our Newsletter