Our big financial errors vary by age but a recent Wall Street Journal article highlights a big money mistake than young people are making today – they are not taking enough risk.
The table below is taken from that article and shows that millennials are holding as much as 70% of investible assets in cash. Several studies, not just this one, show people in their 20s playing it very safe by holding lots of cash in bank accounts and making extremely conservative investments.
Reasons for this vary but usually revolve around a lack of financial literacy and a failure to grasp the power of long term investing. Of course the recent memory of a huge financial crash can only exacerbate investment caution. And there will be some who are rightly playing it safe as they save for a new home deposit.
Now for those unsure why they should invest aggressively in these early adult years, it mostly comes down to a single indisputable fact – the power of compounding.
The young have plenty of that most cherished investing resource – time. Being able to put money away for a long time creates the freedom to absorb the ups and downs of a multi-decade stock market investment. And it allows investments to compound over time – meaning dividends and gains are not extracted but are automatically re-invested year after year. Money doubles every 12 years with net 5% annualised gains. Which means the investment portfolio of a millennial should look more like 70% equities rather than 70% cash.
Learning this lesson by starting investing in equities as early in your life as possible can help sow the seeds for a lifetime of unworried investing and ultimately a very comfortable retirement.