Don’t quit on investing: 3 reasons to stay the course (From Ally Financial)
~ Saturday, October 1, 2022 Blog Post ~
By Lindsey Bell, chief markets & money strategist for Ally
Younger investors are shying away from the stock market.
The change of heart comes after many millennials and Gen Z got their first taste of the benefits of financial markets. The bull market, meme stock mania, and crypto frenzy of 2020 and 2021, attracted many newcomers.
Then came 2022. Once-popular tech startups, travel stocks, IPOs and speculative cryptocurrencies endured sharp drawdowns. It’s been an uncomfortable reminder that stocks don’t always go up. But that doesn’t mean abandoning the ship is the answer!
(1) Take a long view
It’s not time to give up on investing now. A better approach — if you were among those who got caught up in the fervor of the boom — is to reframe how you think about money and investments. The stock market should not be treated like a casino. Rather, it’s a mechanism that can help you build long-term wealth over years and decades, not days or weeks.
(2) Get back in the game!
A recent survey from Morning Consult left me a bit disheartened. When asked if they had at least one investment product in their household, younger respondents reported a steep drop from 2021. Just 57% of millennials and 49% of Gen Z adults claimed to own an investment account in June 2022, down from 70% and 60%, respectively, a year earlier.
In our own survey, at Ally, we found that millennials were more likely than any other generation to sell their investments over the past year. 49% of millennials told us they sold all or some of their investments, which compares to 21% of Gen X and 17% of Gen Z. The top reason that millennials sold was to cover household expenses. Losses from crypto investing, inflation and the fear of losing money also resulted in selling by this generation.
Disappointing findings? Sure. Is there an opportunity? Yes. I want readers to take away three investing realities, so you’re encouraged to ‘keep on keepin’ on’ with an investing plan.
a. Volatility is a feature of the market, not a bug. It’s a breeze to invest during calm markets like 2017 or when stocks go to the moon. However, when the opposite happens, stocks drop multiple percentage points in a day, anxiety kicks in.
No one likes losing money — the pain of losing feels twice as bad as the pleasure of gaining feels good. The reality is the ups and downs in the market are normal.
In a typical year the S&P 500 will endure a 14% decline on average, only to end the year with a positive return 76% of the time. In other words, you have to live through the volatility to earn solid returns. The less time you’re invested, the higher level of volatility you will experience.
The longer you’re invested, the effect of volatility decreases. You can benefit from volatility and the natural market dips by keeping up with a periodic investing schedule, like buying funds every two weeks.
This way you get the benefit of lower prices when they occur without having to time the market.
b. Time is the biggest asset of all. Everybody must toughen up when bear markets strike. The good news for younger investors is that time is on your side.
How important is time in the market? When you start investing early and you stay invested, you’re letting your money do the heavy lifting for you.
The chart below is among my favorites to illustrate the power of saving early and often. Contributing $20 per month for 20 years can yield an account value of nearly $12,000.
Begin 10 years later, though, and you’d have less than $3,700. Start even later in the game, and it’s hard to build significant wealth. This illustrates the benefit of compounding- the more time you have in the market, the greater your return could be.
Being committed to your financial future, having patience, and discipline is the best recipe for building significant wealth.
c. No regrets. Often as people age and look back on the past, they talk about certain regrets. It is usually the regret of ‘not doing something.’ Recent research by Ally found that 75% of people wish they had started investing earlier.
It’s the classic case of hindsight being 20/20. Better saving and investing habits early in your career go a long way toward securing your financial future as you approach retirement. But other financial goals can also be better achieved by investing sooner.
Major expenses like a wedding, down payment on a house, childcare, fun vacations, and your children’s college costs are just some financial hurdles so many of us will encounter sooner rather than later.
If you feel intimidated by investing for these big-ticket items, consider working with an experienced financial advisor who can tailor a plan for you.
The bottom line
To all the younger investors out there that crushed it in 2021 but now see lots of red on their position pages, take heart. Focus on the long haul, stay invested, and keep contributing to your investment plan. Consider working with a pro who can ensure you are doing it right.
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Expert Take with speech bubble icon
Headshot of Lindsey BellLindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience.
Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank.
She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being.
An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.
Chart titled; Time is on your side. Starting early allows your money to work for you. Chart shows years until withdrawal with a contribution of $20 per month and an 8% average annual return. Shows how investing $20 per month over a twenty years period ago yields an account value of $11,780 today, investing $20 per month over a ten year periods ago yields an account value of $3,659 today and investing $20 per month over a five years period ago will yields an account value of $1,470 today. Source: Ally Invest, Standard & Poor’s*Based on $20 contributions per month, and an 8% average annual return.
