Why Young Investors Should Stick With Stocks

Young investors
Young investors

The occasional, inevitable stock market crash tends to drive some investors away -- some more permanently than others. Alas, those who stay away will probably wish they hadn't, especially if they head for the exits while they're still young.

Money magazine compiled these worrisome statistics earlier this year:

  • A study by a mutual fund industry trade association found that two-thirds of those under 35 are not willing to take substantial or above-average risks with their portfolios. That portion was close to 50% in 2005.

  • A Merrill Lynch survey of wealthy investors found that the percentage who professed to have low risk tolerance was far higher among those under 35 (more than half) than among those aged 35 to 64.

  • Per the folks at MFS Investment Management, 35% of young investors agree with this shocking statement: "After what's happened in the markets the past few years, I'll never feel comfortable investing in the stock market."

The likelihood that many of these folks won't snap out of their pessimistic mind-sets is even more troubling. Those who grew up in the Great Depression often clung to anti-stock attitudes for the rest of their lives.

You're Gonna Regret That When You're Older

The anti-stock attitudes of young investors today are reflected in answers to an NPR Facebook post, asking to hear from any 18- to 30-year-olds who cashed out of the market because of the August crash. One 30-year-old fellow confessed to cashing out of all his stocks and moving his money into gold, while a twentysomething said that she and her husband cashed out their IRAs, which they'd built up over five years.

These respondents' aversion to stocks is a crying shame, and it suggests that no one ever taught them a few basic financial facts:

  • The stock market has averaged around 9% in annual returns over the past century, despite slumps and slides. While the stock market does have down years, the up years outnumber them.

  • Market crashes can provide great buying opportunities.

  • It's hard to beat the stock market's average return with other alternatives. Bonds, bank accounts, gold, and real estate, among other options, all offer significantly slower long-term growth, on average.

  • Most importantly, young investors have the most to gain from the stock market, at the least overall risk.

The Pros and Cons of Youth

Big market slumps can hurt, and they might even last a while. But if you're 30 years old, you probably have at least 35 years in which to let your money keep growing. Over that time, you'll not only have a chance to recoup any short-term losses, but also put them far behind you.

While young people have the most to gain from the stock market, they typically have the least to invest in it. But that needn't doom them. No matter your age or situation, you can often find more money than you thought you had to invest.

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For starters, assuming you're lucky enough to have a job in this economy, you can save more aggressively. Many young folks are hardly putting any money toward retirement at all. Going from saving 0% of your pre-tax income to 10%, or 10% to 15% or 20%, will make a huge difference. Remember that the dollars you invest today might have 30 years to grow, while dollars invested in future years won't be nearly as powerful.

Feeling bold? You might even get really creative about taking advantage of the dip. One of the NPR respondents said he might sell his car to invest the proceeds. If he nets $10,000 from a car sale, invests it in the stock market, and averages 10% growth, his car today would become a big $174,000 chunk of his retirement nest egg in 30 years.

Position Yourself for Success

Whether you're young or older, give the stock market serious consideration for your long-term money. CDs are much "safer," but if your money hardly grows in them, you're actually putting your retirement at risk. You can park all or some of your money in stocks very easily via a broad-market index fund such as the SPDR S&P 500 (SPY) or the Vanguard Total World Stock Index (VT).

If you want to add some individual stocks to your mix, you needn't look for any esoteric highfliers. Simple blue-chip dividend payers such as Procter & Gamble (PG) or Waste Management (WM) could make great investments. So can solid, faster-growing companies like Intel (INTC), a high-tech giant currently offering a hefty dividend. Willing to take on a little more risk? Look into tech giants Apple (AAPL), Oracle (ORCL), or even Google (GOOG).

Investing in stocks isn't rocket science. Whether you're young or old, having the courage to stay in the market through all its short-term swings can really pay off down the road.

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Longtime Motley Fool contributor Selena Maranjian owns shares of Google, Apple, Procter & Gamble, and Intel, but she holds no other position in any company mentioned. The Motley Fool owns shares of Waste Management, Google, Oracle, and Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Google, Intel, Apple, Waste Management, and Procter & Gamble, as well as a diagonal call position in Intel and a bull call spread position in Apple.

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