1. Stock market returns in the long-run
I recently did a workshop and someone made a comment, “I am contributing each month to my 401(k) plan, but it is all going to a money market, because the stock market has been doing so horrible!’ That could not be any further from the truth.
Breaking news: the stock market isn’t doing horrible.
In fact, the stock market is doing fabulous. Yes there were major losses in 2008, but since then the stock market has been on the up and up. It’s wild and crazy to put money aside for your future and to miss out on these gains.
The S&P 500 is an index that follows the 500 largest American companies and is often used to determine the overall health of the American Economy. Investing for Dummies stated that from 1926-2011, which spans from the Great Depression through the Great Recession, the S&P 500 earned an average of 10.4%.
Don’t believe me that the market has bounced back?
If losing out on compounding interest isn’t reason enough to invest in the stock market, here’s another risk that millennials are overlooking.
I love cash and use cash for day-to-day purchases (you spend about 12- 18% less with cash purchases versus when you use a credit card). Plus, I have over a year’s worth of expenses saved for an emergency and that is in a basic savings account earning less than 1%. However, when it comes to my future, my retirement, and my long-term investments there’s no way I’m stashing away cash because of inflation.
The stock market has no guaranteed return, but don’t be fooled with your retirement account invested in cash you are losing money every year. If a 25-year old maxed out their IRA and contributed $5,500 a year until age 65, they would have contributed $220,000. Their portfolio being 100% in cash long-term earning 1% would be valued at $270,327. This would be $82,811 when adjusted for 3% inflation.
That is a huge loss on investment.
If instead that 25-year old had earned the average return of 10.4% at age 65 their account would be valued over $2.8 million. This is just under one million when adjusted for 3% inflation. Our generation has a DIY retirement with pension plans disappearing, increasing life expectancy, and rising medical costs. We have to invest smarter than any other generation and see our money making money, not diminishing over time due to inflation.
Don’t follow this investing trend for millennials of stashing cash for retirement.