I began urging investors to hop into the market around the start of the year and, since then, the S&P 500 has enjoyed pretty healthy gains.
Until recently, that is. Summer volatility is under way and, over the past month, the index has slid nearly 5%.
Call me crazy, but I think a swoon is actually the best thing that could happen to young investors right now.
Let me explain.
To start, I have to be honest: My constant cheerleading of investing is a bit out of character. My friends, family and co-workers are more used to me sporting a generally skeptical and pessimistic attitude … including quips that hope is bad, happiness is overrated and pessimism can be healthy.
But part of the reason I say such things is that most people don’t. Hope and optimism are generally seen as universally good; expressing an opposing opinion seems like the best way to spark a more nuanced view.
Investing is the same way. Part of the reason I’m so … well … bullish on young folks beginning to invest is because I know so many people my age who don’t want anything to do with it. They seem overwhelmed, scared or ignorant when it comes to the market. They think investing is for later, for the next life stage. They haven’t even opted in for their company 401ks because they’re just getting by as it is.
Heck, even millennials who actually are in the market have seemed fearful in recent years. From 2007 to 2012, investors between the ages of 20 and 29 slashed exposure to stock funds in their retirement accounts by half, according to Fidelity Investment.
You get the point: I felt like I was swimming against a pretty heavy current of fear, ignorance and a lack of desire.
Now, though, I’m starting to think that current maybe isn’t as strong as I thought … and, worse, that it’s weakening for the wrong reasons.
According to the Investment Company Institute, young folks are not sitting on the sidelines … and they aren’t afraid of taking on risk. One piece of data from its 2013 Fact Book: 26% of households below the age of 35 were willing to take on “substantial investment risk” in a survey of 4,000 households, compared with only 18% in 2011.
That’s good, mind you. Except that Fortune followed such data with this explanation:
Rising stock markets are driving this increasing risk appetite among the young, says Russ Koesterich, Global Chief Investment Strategist at BlackRock. “Market momentum influences retail investor behavior,” says Koesterich, adding that it is typical behavior for people to be more willing to take on investment risk when the potential for reward seems high.
First things first: Yes, being in the market is still the way to go. All else aside, the power of compounding alone should be reason enough for you to get started today. And taking on risk is smart when you’re starting out since you still have the rest of your life to recover any losses.
But investors — especially new ones — still need to be smart about the process … and smart about their expectations. Plowing into a rising market with too much optimism and the expectation that stocks will just keep on marching higher isn’t getting over your previous fear — it’s ignoring it.
If you don’t acknowledge the reality of risk, the slightest downturn — to say nothing of an event like the market meltdown of the past two days — will bring all those jitters right back up to the surface, making you ready to run scared all over again. That’s the perfect recipe for buying high and selling low, which is a far-too-common mistake for retail investors of all ages.
Instead, investors need to believe in potential upside long-term, which means being prepared to brave the market when things get rocky. Even Koesterich nods to this, saying, “If your investment horizon is anywhere over three-to-five years, short-term market fluctuations do not matter.”
In other words, you shouldn’t be scared of them.
The market’s going to sell off here and there — and that’s actually a good reality check for young bulls rushing to snatch up stocks … not to mention a great buying opportunity.
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