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Though they still have decades until retirement, many millennials are sitting on the sidelines amid the stock markets recent volatility. And that could hurt their finances in the long runcompounding problems for a generation that has long struggled to build wealth.
Millennials were the most likely to de-risk some of their assets and turn to cash during last years market rout, according to Ernst & Youngs 2023 Global Wealth Research Report, which surveyed more than 2,600 clients between October and November 2022.
Nearly half (47%) of millennials sought safety in cash last year, according to the report, compared to 34% of Gen X and just 24% of baby boomers (the survey did not poll Gen Z clients). A separate report finds millennials allocated a third of their retirement assets to cash in 2022.
As the Federal Reserve raised interest rates to try to curb inflation, cash options have become increasingly attractive. Many savings and cash accounts are now offering 3% to 5% yields, and CD rates have also jumped.
But that doesnt mean that money that would have been invested should be diverted to deposit accounts with slightly higher yields. While moving to cash may have made millennial investors feel more secure during last years volatility, it also means theyve potentially lost out on the markets subsequent rally.
And missing even a few days of the markets rally can be detrimental to an investors bottom line: Those who were not invested for the S&P 500s 10 best days in the past two decades saw half the gains of those who were, according to JPMorgan Asset Management.
In the past 20 years, seven of the best market days occurred within about two weeks of the 10 worst days, according to JPMs datahighlighting how dangerous it can be to sit on the sidelines when things get bad.
So next time market volatility feels scary enough to make you second-guess your long-term investment strategy, have a good think before you get out of the market, writes Elyse Ausenbaugh, global investment strategist at JPM. There could be a 70% chance youll miss one of the best days.
Another blow for millennials
This isnt the first time millennials have been found to make this investing mistake. Many members of this generation, who now range in age from 27 to 42, still carry scars from the Great Recession, exacerbated by the many swings of the market so far in the 2020s. Its long been a storyline that this has made them a little more cautious than they might be otherwise.
But financial planners say investingand taking the markets highs and lows in strideis still the best way to try to outpace inflation long-term. Millennials already have less wealth than previous generations at their age, due to many economic factors outside of their control. But staying out of the marketsomething they have some control overcould exacerbate that.
Millennials are rightfully wary after enduring hit after financial hit. But from the dotcom bubble to the 2008 global financial crisis to the COVID-19 pandemic, there is always a new risk that can make investing in the stock market look like a losing proposition. The market has always come back.
This isnt about dismissing prevailing risks; its about remembering that markets tend to right themselves as those risks pass, writes Ausenbaugh. Since the start of 2017, an investment in the S&P 500 has more than doubled up to the present despite all of the concerns that have plagued investors over the years.
