It Looks Like Market Turmoil Is Scaring Off Young Investors

From today’s Wall Street Journal:

The idea of saving for retirement always terrified Zack Teibloom. With the stock market’s big drop this year, it seems even more daunting.

“I don’t even have one K, let alone 401 Ks,” says the 23-year-old Mr. Teibloom, a recent college grad who works as an editor for a small magazine in Chicago. “I’m worried that if I put money away, it won’t even be safe the way the markets are going.”

The saving and investing habits of young workers have long been dismal. Only 49% of eligible workers in their 20s participate in 401(k) plans offered through their employers, according to a 2007 study from Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm. And less than 20% of this group is saving anything at all for retirement.

Source: WSJ – Market Turmoil Frightens Off Young Investors ($)

Isn’t it crazy how we do the exact opposite of what we should be doing? If the stock market was going up, up, UP, people would be jumping in left and right—essentially buying over-priced stocks. Now that the market is on a downswing, people are sitting on the sidelines. The very next paragraph of the article even mentions this:

Declining stock prices actually favor young investors, because it means the shares they buy have more room to grow in the decades before they hit retirement. But anecdotal evidence suggests the rocky stock market is scaring off many young people.

My advice:

1. Remember this quote from Sam Stovall, chief investment strategist at Standard & Poor’s:

“Since 1950 we have had 48 pullbacks – meaning declines of 5 – 10%. We’ve had 18 corrections – meaning 10- 20%, and 8 bear markets. At the worst on average we end up getting back to normal in about 3 1/2 years. But people just don’t want to wait that long and they let fear overtake their emotions.”

2. Take a look at these posts from my archives:

Why the Long-Run is so Important When Investing in Stocks

S&P 500 Rolling-Period Total Real Returns

3. Read Jeremy Siegel’s Stocks for the Long Run*.

4. Finally, if you’re young enough, tell yourself this: “I’m young. I have 30 years until retirement. I’m diversified. Why do I care what the market is doing today? The stock funds I’m buying today are on sale and I’m getting a good deal if I keep them for the long-run.”

Sitting on the sidelines isn’t a good option.

* Affiliate Link

16 thoughts on “It Looks Like Market Turmoil Is Scaring Off Young Investors”

  1. I totally agree with you. I think the root of the problem is that people don’t understand the nature of the market and thus, they FEAR what they do not understand. This actually is a good instinctive defense mechanism. But when you combine that FEAR with LAZINESS (not educating yourself on the nature of the market), then it becomes a problem. the instinct is a good one, the response to it is not.

  2. I understand what is going on. I understand that on many levels it is a good thing for me, as a young investor.

    For me personally, it’s not misunderstanding, it is emotions. It is difficult to watch balances drop, even if i know I shouldn’t care today.

    It’s hard, but I’m staying the course.

  3. I think that many young people also use the faltering economy as a justification for not saving. It’s sad but true… A lot of people my age just do not want to save – they want to spend! Being able to blame it on the economy gives them an “easy out” from saving.

  4. This is more evidence that Social Security should
    not be privatized. Most individuals are not ready to invest their retirement money in the market. If we add Social Security, many people will be in serious trouble when it is time to retire.

  5. @JT,

    That is their problem. If you are too lazy to handle your own finances and pick up a few books, and are too scared to take your own money into your own hands, then that should be their problem. Don’t you think if SS was privatized then we would have many, many firms helping people invest properly? Sure we’ll have our fair share of shady firms making bad deals or running away with private SS money, but thats the free market. I, for one, know I could do a million times better with my SS money than the government. In fact, I’m not even counting on SS in my retirement projections.

  6. Sadly, I’m seeing a lot of this first hand. I gave a presentation on Monday to a group of new incoming employees on their retirement benefits, and I literally had some of the younger people laughing at the thought of enrolling in the 401k.

    Even though there is a fixed account option with a 4.1% rate, and even though there is a company match, most younger people (under 30) were balking at the idea of even saving enough to get the 100% return on their money with the match. The only people taking advantage of this were the older ones who have investments already or were experienced with investing for retirement.

    Sadly, if the 20-somethings use this as an excuse to put off starting their retirement savings, that generation is going to be no better off in 30+ years than the baby boomers who on average don’t have more than one year’s worth of retirement savings.

    Waiting for the perfect time to start saving/investing is like waiting for the perfect time to have a baby. There will never be a perfect time, and you’ll end up waiting until it’s too late.

  7. While I am myself looking at the current environment as more opportunity than trial (I’m still pretty young, under 40 at least), I don’t scoff at people being afraid to invest at this moment.

    Your quote about bear markets being short-lived is backward-looking, as all such things must be. It is not at all clear that we aren’t on the brink of something like the decline in the Japanese market at the end of last century. If you had been heavily invested there, you’d be way down after a decade even.

    I can understand a person who doesn’t think they could stomach that personally. And when I invest, I well know that a decade like that is what I’m risking against. If you couldn’t lose money, you wouldn’t enjoy the premium that stocks generally afford over other investments.

    Personally, I think Larry Swedroe has nailed the idea of risk better than pretty much any other author I have read. I found it in Wise Investing Made Simple, but the idea is about the same in all of his books. Risk means you could lose money, maybe more money than you are really comfortable with. And it might be gone an inconvenient period of time; longer than 3.5 years.

    Lots of times it doesn’t take that long. But we can’t kid ourselves. We might be digging out of this for a very long time. It is entirely possible that in 2018 we’ll be reading magazine articles about how all the rules we used to believe in were wrong. Stocks didn’t hold against inflation. They didn’t outperform every decade, etc.

    If the stock market does any one thing well, it incorporates the truths that “everyone knows” and nullifies them. The fact that everyone knows that stocks are best for the long term, and that over a ten year period stocks never lose money, (add you favorite rule of thumb here), makes me particularly nervous. Houses always go up in value after all….

  8. I just got into the market this week. I just opened a Roth IRA and put my meager $600 initial deposit into an index fund.

    I’ve got direct deposit set up for $200 per paycheck (bi-monthly) and will keep adding to that index fund till I start grad school in May. At that point I’ll be leaving my good paying job and doing research part time…I still haven’t figured out how much I’ll be able to invest on that income.

    I’m hoping that the market continues to sit low so I can get more money into it before it goes back up.

    My wife and I are 24 and 26 respectively and we’ve got 2 kids.

  9. JLP said:

    I’m pretty sure they’re spending it!

    So it looks like they are keeping up out of recession.

  10. In this time, it might be a better bet for investors too look at safer places for their money like CDs no? Sure you won’t get as high a return as you would on booming stocks, but in this market, any return is a good one.

  11. I’m 27 and I can tell you really simply why we are not investing.

    1. Since the day we graduated we’ve seen nothing but bad news. Huge tech crash, current crash. We’re not even back to where we were almost 10 years ago.
    2. We have huge student loans to pay back.
    3. Finally got out of college in 2004, saved as much as possible and am currently underwater…may as well have spent that extra money.
    4. There are no solid investment vehicles that are even matching inflation right now.
    5. We want to start families soon and need short-term funds, not long-term retirement funds.
    6. We don’t really have much trust in our country. Frankly, I don’t think the US is really #1 anymore and our economy will only decline in the long run unless we are willing to tackle education’s inadequacies, stop giving money for oil to countries that hate us, stop wasting money to blow up brown people, and truly address the issue of consumerism.

    We don’t see the market as a stable investment for the near future and would rather sit on cash and then get in either in the US once we balance out or elsewhere if my dollars are still worth anything.

  12. How to handle a down market when investing…

    1. Come up with a plan.
    2. Stick to that plan.

    and you will be fine over the long term.
    short term news just scares the hell out of you and makes you divert from your original plan.

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