When you’re young, saving for retirement—something that’s years away—probably isn't your first priority. But that doesn't mean it’s OK to wait to 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 asset mix when they are younger—that is, tilt more toward stocks,” says Steven Feinschreiber, senior vice president, financial solutions, for Strategic Advisers, Inc. (a Fidelity Investments company that is also a registered investment adviser).
Unfortunately, some younger people appear to be not choosing stocks. When we asked young people (Generation Y, born 1978–1988) how they were investing, 52% of them said they had 50% or less allocated to stocks. Further, 26% 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 have when you retire.
Other Fidelity data, however, suggests that there is a potential bright spot that may offer a pathway to better retirement savings outcomes. 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 often a target-date fund.
With a target-date fund, you just pick the fund with the target year closest to when you want to retire. The target-date fund manager selects, monitors, and adjusts the mix to match the target retirement date. This suggests that professionally managed investment options, such as target-date funds and managed accounts—which are often options in many 401(k) plans—can help millennials get on the right track for retirement success.
But for those who may be stock shy, here are three reasons why you should choose stocks when saving for a far-off goal like retirement.
1. Stocks 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 5.3%, and short-term investments 3.5%, before inflation.2 Of course, it wasn't a straight line up for all, but what this shows is that stocks typically offer 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 ride out the ups and downs of stocks.
So you may know that it makes sense to own more stocks, but market downturns might still make you nervous. The headlines can be scary. Remember this: It may be painful for a while, but if the stock market behaves as it has over long periods, you should eventually be better off. 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. Try not to let short-term volatility cause you to move away from stocks. 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.
Let’s look back in time to illustrate the point. Consider three very poor market scenarios: the Great Depression, the early 1970s, and the recent 2008 Great Recession. Say you had an aggressive portfolio of 85% stocks and 15% bonds in your 401(k) during the Great Recession of 2008. You would have lost around 44% from October of 2007 to February of 2009. But, if you held on to those stocks, by April of 2011—less than four years later—the portfolio was back to its 2007 high. While this may seem like a long time, it is a small part of a 40-year investment horizon. There is no way to predict how long it will take for the market to recover though. It took almost 14 years during the Great Depression and a little more than three years during the 1973 recession. But in both cases, the market recovered and those who kept investing were rewarded.
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 typical investment mixes (see below), and 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. Having a significant, age-appropriate, exposure to stocks may, over time, increase your balance at retirement. If you aren't comfortable choosing stocks and stock mutual funds yourself, consider a target-date fund or managed account. When the target date of the fund is many years away, the portfolio manager tends to invest more aggressively by allocating more to higher-risk investments that offer greater potential for growth, like domestic and international stocks.
The bottom line
Odds are you need stocks to save enough to live the life you want in retirement. 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, consider a target-date fund or managed account.
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