If you’re under 35, you probably got your first glimpse of the stock market during a bumpy time. The dot-com bubble burst at the beginning of the ‘00s, and, just a few years later, in ‘08, the market plunged as the global economy fell into a serious funk.
Many investors sold their stocks and headed for the proverbial hills—and were too rattled by the experience to dip a toe into the markets after 2008. And that may be the worst part. The stock market rebounded in 2009 and went on to grow more than 200% from the bottom of the dip in 2009 to the end of 2015.
Even though the drops might be hard to stomach, young people may need stocks in their investment mix. Here’s why.
1. Stocks have offered potential for growth.
One of the best ways to grow your money over time may be investing in the stock market. Historically, U.S. stocks have consistently earned more than bonds over the long term, despite unpredictable ups and downs in the stock market.
From January 1926 to March 2016, stocks returned an average of almost 10% annually, bonds 5.4%, and short-term investments 3.5%.
- Read Viewpoints: "Six strategies for volatile markets."
2. You have time on your side.
Evaluating the opportunity presented by long-term investing involves the consideration of three essential ingredients: money to invest, time to stay invested, and an investing plan that includes your goals and assumptions for things like the annual rate of return you might receive. If you’re aiming for a certain goal—say you want to save $1 million by the time you turn 65—you can start early and save a little each year or you can start late and then have to save a lot each year.
Pulling any of the levers means you may have to change the other settings as well. A lower expected rate of return could require a higher level of saving in order to hit your goal—or require you to start saving earlier in life. A later start most likely means needing to save more each year—potentially a lot more. If you start saving too late, you may even find that you can’t retire as early as you had planned and will need to work a few more years.
Consistently saving and investing has historically helped investors achieve their goals. It sounds almost too easy but if you have a long investment horizon, a smart long-term plan based on your time frame, financial needs, and risk tolerance is what you should focus on—not short-term volatility.
- Read Viewpoints: "Investing tips for young people."
3. You don’t need to invest all your money in stocks.
Here’s some great news. You can take advantage of the growth the stock market has historically provided by investing a portion of your money in stocks and putting another portion in relatively stable investments, such as certificates of deposit, money market funds, or some types of bonds. Your mix of investments should be based on your time frame, financial goals, and tolerance for risk.
Take a look at seven typical investment mixes below and their historical returns over different time periods. Each portfolio has a different level of exposure to stocks. There may be one that’s just right for you.
As a general rule, young investors with long time frames may want to consider a relatively large and broadly diversified exposure to stocks because they have more time to recover from the market’s ups and downs. Combining early and consistent saving with the level of volatility you can stomach with an age-appropriate helping of stocks could help you reach your long-term goals.
Past performance is no guarantee of future results. The asset class (index) returns reflect the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or future performance of any investment option. It is not possible to invest directly in a market index. Stocks are represented by the Standard & Poor’s 500® Index (S&P 500® Index), bonds by the U.S. Intermediate Government Bond Index, short-term investments by U.S. Treasury bills, and inflation by the Consumer Price Index.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917