Maybe you’ve seen the meme: “I’m glad I learned about parallelograms instead of how to do taxes. It’s really come in handy this parallelogram season.”
Born sometime between 1980 and 1996, millennials are (roughly) between the ages of 22 and 38 today. Most of us were not offered classes like “Paying Your Taxes,” “Asset Allocation 101,” or “How to Adult.” We are on the cusp of entering our prime learning years and learning a lot of these fundamentals as we go along.
So far, 2018 looks like a great year for experiential learning about long-term planning and volatility in financial markets. As of mid-April, the Dow had already closed up or down in excess of 400 points from the prior day on 11 occasions. Yet the market’s overall value hasn’t changed much since the year’s start.
Millennials, particularly, should not fear the recent bout of stock market volatility. In fact, volatility and uncertainty are features of stock markets, not bugs in the system. With risk comes reward. As one of the riskiest liquid asset classes, stocks are the growth engine of your portfolio. Bonds and alternatives are there to smooth out the ride.
Not every correction is a crisis, but there is an entire generation of the investing public that has only seen crises. Millennials generally entered adulthood in the years between 1997 and 2014. What else happened in that period? The dot-com boom and bust. September 11th. The financial crisis and bear market of 2007-2009. In South Florida, millennials also saw a huge real estate boom… and bust.
When you own a piece of property, you probably have a pretty good idea of what that property is worth. It’s an imperfect measure, though, usually somewhat based on comparable sales or “comps.” These sales can happen frequently, or not.
Stocks, though, are constantly traded throughout the business day. Every trade is a comp, and there is a lot of data generated by all this trading. It’s important for a long-term investor to recognize that most of this data is actually just noise.
A simplified example might help. My 31-year-old friend, “Robert,” has two major investments that he keeps track of: his home in Edgewater and his investment portfolio. Robert keeps a close eye on the real estate and financial markets. Every day Robert sees that the market is down several hundred points, he feels a pit in his stomach. Every day it goes up, he feels great. He watches home sales in his neighborhood but generally thinks about the stock market more because he has access to more information on its daily movements.
Robert is about ready to throw in the towel on his investment portfolio: “It’s just too much. I can’t take these wild swings.” But the reality of the situation is that Robert is investing for the long haul and will not need the money in his investment portfolio for at least 20 years. If Robert could limit his intake of market “noise,” he’d feel a bit saner.
I am here to tell you that, especially for millennials, risk can be a good thing. The great thing about uncertainty is that it cuts both ways. Everybody freaks out about volatility and risk on days when the stock market is down, but you don’t hear much about it on up days. People in their 20s and 30s today have decades, not years, before reaching retirement age. In other words, there’s a lot of time to recover from corrections and even prolonged bear markets. This tolerance for uncertainty does change over time, though, so it’s important to review your portfolio positioning at least annually.
It’s never too late to start planning. There are a lot of great resources available, but also talk to your friends and family. Speak to a professional. The most important takeaway is that you have a plan that takes into account when you will need to access your savings, considers how much uncertainty you can tolerate between now and then, and ensures that your future investments are all working together to get you closer to your goal.
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