12/28/2011 3:30 PM ET|
401k's not working for Gen Y
Young employees are reacting unwisely to a volatile stock market that seems to have put their retirement savings in peril. Here’s what to do instead -- and why.
Putting the investment decisions in the hands of employees isn't working for Gen Y. When we read that 40% of Gen Y investors reportedly agree with the statement "I will never feel comfortable investing in the stock market," it sends a signal that they are making reactive investment decisions, and those are rarely good in the long run. It is certainly understandable, though, when you think about the timing of their first jobs and their first experiences with investing in their 401k plans.
Imagine seeing your very first statements showing less than what you put in, with your hard-earned money being sucked out to nowhere. It certainly wouldn't give you much confidence. Gen Y never had a chance to learn about investing before its members were jolted by a near 40% market drop in 2008. This drop frightened even the most seasoned investors, but it shook Gen Y investors to the core; 52% of them liquidated a portion of their portfolio in 2010 or 2011 due to market concerns.
They have 30 or 40 years before they need the money, but they are using reactive short-term strategies rather than implementing proactive long-term ones. Still, 71% of employees under 30 who have used our online financial-assessment tool report having a general knowledge of stocks, bonds and mutual funds. The problem may be how to apply this knowledge to their personal situations. Only 23% in this age group (the lowest of all the age groups) report they are confident that their investments are appropriately allocated. The reason they aren't confident is probably because their investments aren't properly allocated.
The average Gen Y investor has 30% of his or her assets in cash, the highest of all demographic groups, according to the latest MFS Investing Sentiment Survey results. This would be fine for a baby boomer or even a Gen X employee, but not for young employees starting out. They might feel better today with a high cash balance, but the risk is that they will feel worse down the road when their assets haven't even kept up with inflation. Moreover, they may be missing out on a once-in-a-lifetime opportunity to accumulate shares of growing companies at low share prices during a weak economy.
They haven't learned some time-tested investment strategies because they have been too busy playing defense. When you are being punched in the face, it is difficult to think about anything other than moving to safety. You just want to get away from your attacker and retreat to nurse your wounds. Because of their focus on defense, something is missing for the Gen Y investor -- a piece of the puzzle they either were never taught or aren't open to because they are too skeptical after their bad experiences.
Gen Y employees might be distrustful of the market and wary of corporations, but they are perfectly comfortable buying their products. The whole world is in love with cellphones, but to Gen Y they are an appendage, not a tool. They also buy iPads after waiting in line at the Apple store, subscribe to DirecTV, grocery-shop at Whole Foods, buy clothes at Abercrombie & Fitch and equip themselves to surf the Internet 24/7 with computers and connecting service. They drive, buy gas and eat fast food. In other words, they are heavy consumers of products but not investors in the companies that make them. Here lies the disconnect, and ultimately the investment opportunity.
Following are some time-tested investment strategies that Gen Y (and the rest of us) can use:
Match your investment strategy to your goal
Simple but true. Every investment has a goal, such as providing future income in retirement, and the strategy needs to match that goal. The greatest investor of all time, Warren Buffett, once said, "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes." If you've done your research when you make your initial investment, volatility shouldn't be the only reason to abandon the strategy. Volatility comes with the territory when investing in stocks.
VIDEO ON MSN MONEY
Gen Y is .. three time the size of Gen X
It sounds like someone is trying to con Gen Y, like they did to Gen X youngsters, into buying some snake oil. Take care of the basics (housing, food, education and medical bills) and don't put to much strain on your brain about buying those down hill ski boots when you get to my age.
Trust me .. getting old isn't about having fun past retirement age.
Unfortunately I could not disagree more with this writer's advice. Yes they have a long time to go. But to invest for the long term because that is what they say to do is sticking your head in the sand. The stock market since 2000 is never going to be like it was the 40 years preceding it. It is controlled by big millisecond traders. Everyone's goal should be to preserve capital and avoid losses. There is not going to be any long steady growth ever in the stock market again. We are a global economy and that makes things to volatile. If I keep pace with inflation, then I am happy. Forget abot the historic 8-10 % average return. Those days are gone. And you are a fool if you think otherwise.
Yes you need to be in the market, but not to the same % all these advisors are still trying to push. Even they have not faced the reality that the good ole days are gone.
I have been sticking through it with my 401k account, which my company matches at 50 cents to the dollar. Over the last two years I have lost more money than I put into it. In an effort I have decided to wait and see what my January statement has to say, have lost over 25% of my account balance every quarter for the last 7 quarters. If you truly think that 401k’s are the best investment for you money, think about this if I had invested the same money in a C.D. or savings account I would have seen a 27% better return on my investments. Clearly the people managing my money are clueless at best not to mention the 10% of my account balance they take every quarter in fee’s before any other losses are figured in. I would give the advice that you are truly better off to invest your money yourself, take a save route if do not understand the stock market at least the money you invest will still not disappear in a savings account. And NO money doesn’t magically reappear in you 401k later once it is gone, it is gone forever, you only make money on what is left when the market picks up.
My wife and I put 10% in our 401k's and they aren't as doom and gloom as everyone is making them out to be. Over the past 6 years we have been investing (I'm currently 29) and we are still in the positive. We have adjusted our investment strategy over time, but we haven't stopped investing. Many people who don't continue to contribute to a retirement plan will just spend the money as opposed to putting it in savings or paying down debt. Several people have had bad experiences and skews their thoughts on all financial advisors. As a part of some companies retirement plans, free financial advice is included with a qualified advisor. Utilize that service if you don't know what you are doing, you will be happier in the long run.
By the way, none of these articles on MSN are supposed to give you a golden pill to fix everything. Read the article and then question what they are saying. Not every bit of advice is perfect for everyone.
We Need a New Product
What might this new product look like? Let’s take a look at this issue from the participant’s perspective.
Most people are annoyed by the ridiculously convoluted rules and regulations surrounding retirement plans; it’s absolutely comical. Start by getting rid of all that.
For financial professionals, wild swings in stock values are accepted as normal. A 401(k) being reduced by 40% during a given year is unfortunate, but to be expected. And if stocks underperform bonds for 10 years or longer, don’t worry. In another 10 or 20 years the returns will swing back around in favor of stocks. Therefore, in the financial pro’s mind it makes perfectly good sense for the 401(k) plan to continue offering 18 equity funds and 2 fixed funds. To the average guy on the street, this wild-eyed Jim Cramer way of thinking easily meets the definition of insanity. In other words, the financial sector needs to tone it down with all their complicated, high risk products; they’re scaring people. If you are offering a wild ride on a rollercoaster, you should expect a large percentage of the population to decline your offer.
The guy next door does realize that preparing for the future is important. But it concerns him greatly when some know-it-all in a dark suit tells him that the sophisticated way to prepare for the future is to use the most unpredictable asset class on the planet (equities). A great many “normal” people out there now see that as a reckless approach.
Investing in stocks as a way of staying ahead of inflation has certainly been a useful marketing ploy in the past. But even the casual observer can look back over this past decade and have serious doubts about that tired old “inflation fighter” theory.
And financial pros can stop rambling on about asset allocation and efficient frontiers. The guy next door knows that his tax dollars have just recently been used to bail out many of Wall Street’s best and brightest. He’s no longer so easily impressed by their binder full of charts and graphs.
Keep it simple. Show the participant how socking away a certain amount each pay period will result in a specified level of retirement income. A great many people out there want a much higher level of predictability than what they are currently being offered in a 401(k). The old “step right up folks, place your bets and take your chances” approach to preparing for the future is not what most of the rank and file are looking for. Can you really blame them?
In addition to predictability, they are also looking for accountability. Stock mutual funds don’t offer either of those things. So when you attempt to look at this issue from the participants’ perspective, it really should not be surprising that 401(k)s are unpopular.
The fact is, the DC industry has made no attempt to design their plans based on their middle class clients’ wants and needs. They simply design them based on their own business model. As is always the case, the financial "services" industry has placed their interests ahead of their clients'. They have never been introduced to the term fiduciary.
Unfortunately, there are those who have ethical problems with the DC industry as well. They continue to push the 401(k) plan, despite the fact that it has a 75% failure rate amongst its participants (people are reaching retirement age with balances that are far too small). This may be one of the least effective products ever sold to the American public. It has been stunningly defective.
The financial industry should be required to offer a retirement plan that is specifically designed to have a 75% success rate. If they will finally do that, participation rates will no longer be a problem.
My new goal is to be debt free (no mortgage or anything), basically telling these Wall Street crooks to shove it. The Wall Street crooks have stealing down to a science.
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