Investors who stuck with their investment strategy throughout the lowest months of the 2008-09 market downturn realized an average account-balance increase of 50% through June 30, 2011, according to a new study by Fidelity Investments. Investors who moved to cash during the downturn saw only a 2% increase over this same period.
Write down your goal for each investment, as well as your investment philosophy and strategy, and be sure to review those notes before making any changes.
Invest in equities for long-term growth
If they pay attention to what products and services their peers are buying, Gen Y investors could pick up some investment ideas. There are some great buys out there -- companies that are doing well in today's economy or poised to do well in a recovery but can be purchased today at rock-bottom prices. A self-directed account in a 401k is a great place to accumulate shares in individual stocks or mutual funds from the menu of funds provided by an employer.
Remember that Gen Y has a LOT of peers
Gen Y is a huge demographic -- larger than the baby boomers, three times the size of Gen X -- and makes up roughly 26% of the population. When the economy gets some positive traction, they will buy even more products. As they mature, their needs and their buying habits will change.
The purchasing habits of 30- to 40-year-olds change as they settle down and have families. They'll need to furnish their homes once the old hand-me-down couch from college and the IKEA furniture don't cut it anymore. They will buy minivans or station wagons, diapers and bikes with training wheels. They will be a force to reckon with and will provide an investment opportunity for the savvy investor, just as the baby boomers helped fuel the growth of the stock market in the '90s.
Use the business cycle to your advantage
Embrace the bear. Gen Y investors are basing their investment strategy on the assumption that the market will always be down, which is obviously not the case. We just don't know when it will turn around. Economists are trying to predict when that will be, and they often contradict each other, further confusing the rest of us. If you have a very long time frame, as Gen Y does, you can use the current bear market to your advantage.
I remember talking with a young investor who called our financial help line concerned about a negative account balance. I suggested another way of looking at the statement. The account balance is meaningless when you have 30 years before you plan to sell. Instead of opening your statement and immediately looking at the account balance, look at the number of shares you are buying. Notice that when the market drops, you buy more shares.
When your goal is accumulating as many shares as possible, volatility becomes your friend. Investors with a long-term time frame who are investing regularly should be glad to see how many more shares they bought on the cheap. They can then hold on to them for sale after they retire.
Gen Y employees didn't have much of a chance to learn how to invest before they were thrown into the fire, and they have been reacting to it ever since. The good news is that it isn't too late, since time is on their side. The bad news is that they may not realize they are in the wrong investments until it is too late, and their ultraconservative allocation may not give them the long-term growth they need.
