When you’re young, saving for something that’s years away—aka retirement—may not seem important. But it is exactly when you should start saving. The more time your money is invested, the more time it has to grow. And one of the best ways to give your money a chance to grow over the long term is by investing in stocks and stock mutual funds.
“In general, people should be more aggressive in their investment mix when they are younger—that is, tilt more toward stocks,” says John Sweeney, executive vice president of retirement and investing strategies.
Yet, some younger people appear to be avoiding stocks. When we asked young people (millennials, born 1981 and later) how they were investing, 39% of them said they had 50% or less allocated to stocks. Further, 16% said they were in cash only, according to our Retirement Savings Assessment.1 And that’s not great because too low an allocation to stocks can limit how much money you’ll have when you retire.
Other Fidelity data, however, suggests that there is a potential bright spot. Many younger investors, who have 401(k)s with Fidelity, have an appropriate allocation to stocks based on their age. This is because many are automatically invested in the default investment option in their 401(k) plan, which is typically a target-date fund. With a target-date fund, you choose the fund that is closest to your anticipated year of retirement. The target-date fund manager selects, monitors, and adjusts the mix to match the target retirement date.
If you are among the stock shy, here are three reasons why you should choose stocks when saving for a far-off goal like retirement.
|1.||Stocks and stock mutual funds have offered the most potential for growth.|
U.S. stocks have consistently earned more than bonds over the long term, despite regular ups and downs in the market. Take a look at what $100 would be worth over the history of the stock market (S&P began tracking performance in 1926). During this time, stocks returned an average of almost 10% annually, bonds 5.4%, and short-term investments 3.5%, before inflation.2 Of course, it wasn't a constant straight line up for the whole timeframe, but what this shows is that stocks have historically offered more potential for growth over the long term. That's why investing in stocks, or stock mutual funds, is so important when saving for retirement or other far-off goals.
|2.||You can probably ride out the ups and downs of stocks.|
Got it. It makes sense to own more stocks, but market drops still make you nervous. Remember this: It may be painful for a time, but if the stock market behaves as it has over long periods, you should be able to ride it out.
Thinking of it this way may help, too: Losses are just on paper unless you sell your investments. If you are tempted to sell investments when they are down, remind yourself that you are investing for a time far in the future. So why lock in losses when you have time to ride the market back up? Also, if you save regularly and continue to invest during down markets (and the market demonstrates the kind of long-term growth that it has historically), you will be adding to your savings during those market dips, or “buying low.” When the market recovers, you may be even better positioned for growth.
In fact, as the chart below shows, what looked like some of the worst times to be in the stock market turned out to be the best times. The best five-year return in the U.S. stock market began in May 1932—in the midst of the Great Depression. The next best five-year period began in July 1982 when the U.S. economy was in the midst of one of its worst recessions.
|3.||You don’t need to invest all your money in stocks.|
We believe that an appropriate mix of investments should be based on your time horizon, financial situation, and tolerance for risk. But, as a general rule, those with longer investment horizons should have a significant, broadly diversified exposure to stocks. Take a look at four investment mixes, to see how they would have performed over a long period of time. As you can see, the conservative mix has historically provided much less growth than a mix with more stocks.
What it all means for you
No matter your age—and how far away retirement is—you want to enjoy your retirement years it and do the things you want without having to worry about money. Odds are you need a diversified mix of investments with a significant exposure to stocks to help you do that. So, beware of investing too conservatively. Get used to riding the ups and downs of the market. If you are investing for the long term and saving regularly, a downturn can even help boost your savings because you may be buying shares of a stock or stock mutual fund at lower prices. That is the power of having a long time to grow your money. And if you are unsure of what to do, keep it simple, and consider a target-date fund or managed account.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Past performance is no guarantee of future results.
Target date investments are generally designed for investors expecting to retire around the year indicated in each investment's name. The investments are managed to gradually become more conservative over time. The investment risk of each target date investment changes over time as the investment's asset allocation changes. The investments are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after the investments' target dates.
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