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
Obama can't tax it until it's sold .
There it stay s until the inept lying quasi socialist in the white house is an esoteric, historical footnote.
After that we can look at the market again.
Things will not improve as long as the megalomaniac in the white house is trying to fund his vote buying handout programs and green fantasies off of the backs of business and the rich.
I admire Gen Y investors who have recognized on their own the hoax that the stock market is. My advice to them is to avoid sales pitches and advertisements disguised as investment advice, like this article, and continue seeking alternative investments to the stock market. And when they find the alternatives that work, I suggest they keep it to themselves and don’t tell anyone over the age of 35 about it.
Unfortunately the investment-leery segment of Generation Y is going to have an awful lot of regret when they reach retirement age with nothing to live on. I worked with a woman who decided to retire in her 70s and she thought she was getting a pension. A supervisor explained to her that she had no pension and she had 401k as her retirement income. Well this woman said, "Well then I won't retire, I will just switch to part time."
This woman didn't plan to fail, rather she failed to plan. The same can be said for a lot of elderly people today who will have to work until the day they die. If you want to have a dignified, comfortable retirement, you had better plan ahead. Planning ahead means having a diversified portfolio including stocks, bonds, and other sound investment securities.
I shudder at the thought of working 40 or 50 years with absolutely nothing to show for it, and no pension. Since most pensions have gone the way of the dinosaur, and Social Security will be gone by 2038, then 401k and other securities are really all Generation Y will have for their old age. In the words of Mark Twain, “There is no sadder sight than a young pessimist.”
As a recent retirees, my wife and I maxed out our contributions for nearly 25 years. However, the 9/11 tragedy and the recent "depression" (from 2008 to present) really threatened our savings. Thankfully, I had the presence to place all of my "old" money into a fixed account in 2007, which was against my financial planner's opinion. However, a year later he informed me that it was a great move and that he wished that he would have warned others. My advice would be to place your 401k into a fixed account, until the market recovers, then move new monies into the market. But, continue to pour large earnings into the fixed account. Financial planners would probably frown on this method, but I assure you that it is in YOUR best interest! I would rather have a safe savings in retirement than to have gambled it into the stock market and leave with nothing!!! Best wishes,
Secondly, what does Generation Y's love for technology and certain brands have to do with this article? Write about something you know, like maybe menopause.
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.
I use the 401K for the company match, nothing more.
I'm smart enough to see wall street is rigged, so I won't participate.
I'm investing in myself. 2 years in a row over 100% returns, and I get a better tax break than the capital gains rate gives.
Anyone with a brain is telling wall street to kiss their ****. All the sheep still funnel their money and give it away to people they don't know a thousand miles away. They get what they deserve for not learning their lesson the first time.
I started working full time in the late 1960's. The market was awful for the first 14 years of my work life but I followed my father's advice and contributed to a 403b from 1977-1983. Over the 6 years, I put in a total of $20,000 and my employer added another $14,000. I maxed it out all in stocks even though interest rates were 15% at the time and stocks were awful. I then went to work for another company and left my 403b alone.
Today, even after the market's problems of the last 10 years, that 403b is worth $675,000. (It was worth almost $800,000 at the market top 4 years ago.) Not bad for a $32,000 investment.
The point is:
For the over 4 decades of my work life, two decades were bad to awful.(1968-1982, and 00's) Two decades (1983- 2000) were great. Wait long enough in the market and you will get a few great years. Wait on the sidelines in CD's and you will get eaten alive by inflation.
All of my other 401k's from the rest of my working life are less than $150,000. Those two decades of growth in that 403b are the lions share of my retirement.
I read many of you rail against investing in the stock market and to find alternative investments - please explain to all of us what the alternatives are that can compete with the upside of the market? I am 39 years old and have consistently contributed 10-15% to my 401k since my late 20's. I did not stop contributing through our recent downturn/recession. I earn a decent living, but am not wealthy by any stretch. It is a major sacrifice to "give up" the money and it does not always seem worthwhile, but over time, your contributions, employer match and compounding returns actually amount to real money.
With many years until retirement age, I have absolutely no concern about not being able to retire. The market WILL provide positive returns over the long run, it ALWAYS does.
Choose not to invest in your OWN retirement and you will forever cry about how bad 401ks are, that pensions don't exist, that the rich ... blah, blah, blah. Take ownership for own retirement, make the sacrifice each payday, and you will be well on your way to a comfortable retirement.
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.