Portfolio Risk-Helping Millennials Embrace Investment Risk

Portfolio Risk

Editor: Philip Ragner | Tactical Investor

No one can claim to have mastered the markets fully and anyone that does lay claim to such a title should be avoided like the plague.   For example, after QE all the rules changed and many time-tested indicators simply ceased to work because the operating environment had changed forever. The markets were suddenly hit with a force that they had never been hit with before.  A fed that was determined to destroy any shred of free market forces left in the market.  This surprised everyone, and it even caught us off guard initially.  Many so-called experts refuse to accept that they made a mistake or could be wrong. Bull Markets Vs Bear Markets & Arrogance

Portfolio Risk

Millennials are timider than older generations when it comes to investing their money. It’s not hard to see why they are so reluctant — not only have they experienced two major market crashes in their lifetimes, witnessing firsthand the impact that profound economic downturns can have on their families and themselves, but they’re also facing immediate and intense financial pressures such as dealing with college debt and making the next month’s rent payment.

The data speaks for itself

85%of millennials self-identify as “conservative” in regards to their risk tolerance and only one-third choose to invest in the stock market. While their rationale for this behaviour is understandable, advisors are in a perfect position to educate millennials about the benefits of taking on risk to grow their wealth over the long term. To achieve this goal, advisors should focus on using positive, clear communication and leveraging technology in accordance with millennials’ tech habits.

Educating millennials about the benefits of investing that are unique to their generation is the key to assuaging their fears about entering the market. Using jargon-free language, advisors should underscore that millennials have a long investing time horizon, so the money they invest or save for retirement today has a chance to multiply over a longer time period than if they entered the market later in life.

There are many tools advisors can leverage to drive home these points by tangibly modelling portfolio performance in a variety of positive and negative market conditions. Full Story

CNBC On Portfolio Risk and Millennials

The rate at which stocks have risen since the Great Recession make 25-year-old Rachel Grafman nervous.

“I don’t think the markets can stay this high indefinitely,” said Grafman, a civil engineer in Denver. “When we contract, it will be big.”

Grafman keeps tabs on domestic equities markets and has some knowledge of market history – yet she admits emotions play into her observations.

Though she doesn’t remember the dot-com boom-and-bust, she is aware that it took place and it partly colours her investing decisions.

“I am definitely the more conservative investor among my family and friends,” Grafman said. “Most people are more comfortable with risk than I am.”

Many people misunderstand risk as a concept, said Priya Malani, a founding partner at financial planning firm Stash Wealth, “not just millennials, but everyone.” Full story

 Investopedia On Portfolio Risk and Millennials

In research that stretches from ages 25 to 74, BlackRock’s Global Investor Pulse Survey looks at all but the youngest Millennials (ages 25 to 35), plus Generation X (ages 36 to 51), the baby boomers (ages 52 to 70), and the youngest members of the Silent Generation (ages 71 to 74).

The BlackRock findings reveal that while 59% of millennials have started saving for their retirement, they are reluctant to actually invest their savings. This is likely not good news for their future, as it means they’re shutting themselves off from the historically higher returns investments yield long-term over cash and also squandering the compounding advantage of starting retirement planning earlier in life.

Shrinking Appetite for Risk

BlackRock researchers report that, on average, Americans hold 58% of their assets in cash. That number is 65% for millennials, a slight drop compared to 69% recorded in 2016, but decidedly higher than the cash allocation recorded for other age groups – Generation X (59%), baby boomers (54%) and the Silent Generation (47%). Full Story

 Forbes On Portfolio Risk and Millennials

Around the time Millennials were in high school, the stock market endured the tech crash. Then, as many Millennials entered the workforce, we saw a second financial crisis and then the Great Recession that followed. As a result, Millennials are, understandably anxious about investing in the stock market. Unfortunately, that means that many Millennials may not achieve the long-term investment results that they deserve.

Various studies have highlighted Millennials’ reluctance to take investment risk. A Wells Fargo study found that more than half of Millennials say that they will “never” be comfortable investing in the stock market. A Bankrate study found a quarter of Millennials view cash as the best long-term investment. A Merrill Edge study found 85% like to “play it safe” with their investments. The results from these different surveys are consistent. Jaded by two major financial waves of panic early in their lifetimes, Millennials are reluctant to embrace the stock market. Yet, this comes during a period when the U.S. market has more than tripled off the lows from the last recession, now a decade ago. Full Story

Portfolio Risk and Millennials Stance

“You constantly hear that millennials are allocating their capital to experiential things, and there’s a bit less emphasis on long-term savings,” says Dave Lafferty, senior vice president and chief market strategist, U.S., with Natixis Distribution LP in Boston.

“I think it’s a mistake to say that millennials don’t believe in long-term investing at all. I think they do,” Lafferty adds. “But millennials have a little more jaded view of what the long-term equities risk premium looks like.”

Gauging Canadian millennials’ knowledge of investing*:

  • Not familiar at all, 11%
  • Not very familiar, 27%
  • Somewhat familiar, 47%
  • Very familiar, 14%  Full Story

Tactical Investor Take

The average trader has a convoluted view of the markets and the world. They always bend the definition of risk and opportunity to suit whatever perspective is taking the lead role at the moment.  What is the solution? One has to spot this trait and deal with it immediately. This is done by keeping a diary of how you feel when the markets are soaring and especially when they are pulling back sharply.

A crash is nothing but a perception based on when you opened the long positions. To one trader it could be a pullback because he got in low, while to the one that got in right at the top, its the end of the world.  When you keep a notebook, and you can read what was going through your mind (in real time). When the dust settles, you will spot a pattern that is unique, and you will then be in a position to change.

Market Crashes Operate under the same theme

Sit back and reflect slowly

Go through all the crashes you have experienced, and you will see the same theme in action. In every single instance and there has never been an exception;  the masses panic when it is time to buy and vice versa. One would think by now that the masses would have finally learned something, but alas this is not to be. The masses are always willing to be used as cannon fodder and the players of Wall Street know this only too well.

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