Many millennials have been scared off investing in the stock market due to the 2008 crash that sparked the Great Recession. Markets bottomed out and investors lost money. The worst affected were the people who panicked and pulled money out when stocks were at their lowest points – and consequently missed the market’s rise back to the top.
Here’s the thing: the market will crash again. And it will rise again. And it will do this over and over and over. This is why understanding history is important to getting over stock market fears. By looking to the past, we can begin to understand the future. So let’s have a quick history lesson.
First, understand the consequences of avoiding the stock market. You know how 40 years ago a chocolate bar cost 5 cents, but today it costs $2? That’s inflation at work. If you stuff your money in your mattress instead of investing, inflation will destroy that money’s value over the 30 or so years that make up your working career before retirement. Your mattress money is guaranteed to be worth less by the time you’re ready to retire.
If the thought of losing money scares you, inflation should be far more frightening than stocks. Inflation is constant. Nosedives in the market are periodic and short-lived, and are historically balanced by sharp rises as the economy recovers.
Historically, the average return from investments in stocks is a solid 10%. An average return of 10% is quite high if we consider a “safe” return is about 5% (this is “safe” because you haven’t lost money and you have made enough to cover inflation). Looking at historical trends, we can easily see what accounts for this. Despite down markets from time to time, the overall value of the stock market has always trended up. Historically speaking, the stock market has only ever gained value over time.
You’ll find success in the market if you invest for the long-term, meaning you stay the course both when stock prices plummet and when they explode in bull markets (like they’re doing now). Avoid trying to get fancy in an attempt to make huge returns in the short-term. The market will beat an overactive investor 90% of the time.
Historical data on the market shows us there’s no reason to fear the stock market if we’re smart with our investments. The stock market has never hit zero and over time it has proven that it always moves upward.
You should start investing today. Consider opening a Roth IRA with Vanguard and holding three basic index funds: a total US stock market fund, a total US bond market fund, and an international stock fund. Alternatively, try one of Vanguard’s Target Date funds – your portfolio will be automatically rebalanced for you from aggressive to conservative as you age.
It’s okay if you don’t want to approach investments alone. If you need help, do not hesitate to ask for it. Find a solid certified financial planner that understands the specific needs of our generation. I suggest a CPF who specifically focuses on millennials, like Sophia Bera of Gen Y Planning.
It doesn’t matter so much which path you take. What does matter is that you choose a method of investing that works and makes sense to you – and to start investing today.