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Younger Americans aren't investing in the stock market—researchers think this is why

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If you go about it carefully and follow the advice of the experts, investing in the stock market can pay off. A $1,000 investment in Apple 10 years ago, for example, would be worth more than $7,000 today. A $1,000 investment in Amazon would be worth more than $19,000. You don’t need to pick individual stocks, either. Putting your money in mutual funds or a 401(k) could even help you become a millionaire in as little as 18 years.

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But still, according to a new poll from Gallup, less than half of young Americans are putting their money in stocks. Researchers point to the 2008 market crash and the market’s latest volatility as the main reasons why.

“After the crash of 2008, when the Dow Jones fell more than 50 percent from the end of 2007 to mid-March 2009,” Gallup notes, “the ranks of those under 35 owning stock shrank steadily for the next several years.” Even “a decade after stockholders lost trillions of dollars, younger Americans are still leery of investing their money in stocks.”

Gallup Economy and Personal Finance Poll (Younger Americans Less Likely to Invest In Stocks )

According to the poll, 52 percent of adults under 35 say they owned stocks in the seven years leading up to the crash. By 2017 and 2018, only 37 percent did. By contrast, an average of 66 percent of Americans over 35 invested before the crash, and though the share is lower now it’s still at 61 percent.

The percentage of young adults owning stocks did reach a high of 43 percent between 2015 and 2016, but “the past two years have seen a drop as the market showed strong growth but considerable volatility — including some major declines this year,” reports Gallup.

The drop in stock ownership since the crash does not vary greatly by gender or education for young people, but there are some differences in income, with the greatest changes occurring among those with annual household incomes of between $30,000 and $75,000.

Gallup Economy and Personal Finance Poll (Stocks Rank Second as Best Long-Term Investment)

Many millennials are still hopeful, though. About a quarter of those between 18 and 34 ranked stocks and mutual funds as their No. 1 long-term investment option, higher than savings accounts, CDs, gold and bonds. Real estate ranked highest, with 32 percent of respondents ranking it as their top choice.

That’s a common misconception: Returns on the residential housing market are “not making anybody rich,” says certified financial planner Eric Roberge. “You’re barely keeping up with inflation, not to mention all of the costs that go along with owning a home.”

Astudy from London Business School and Credit Suisse finds that, after adjusting for inflation, housing offered returns around 1.3 percent per year from 1900 to 2011. The average annualized total return for the S&P 500 index over the past 90 years, meanwhile, is 9.8 percent.

If you’re thinking of investing, experts suggest keeping a level head even during times of market volatility. And while “there is not a one-size-fits-all answer” for handling the uncertainty, Greg McBride, chief financial analyst at consumer financial company Bankrate, tells CNBC Make It that a well-balanced and diverse portfolio can help mitigate risk.

Investing experts Warren Buffett, Mark Cuban and Tony Robbins suggest beginning with index funds, which hold every stock in an index, offer low turnover rates, attendant fees and tax bills, and fluctuate with the market to eliminate the risk of picking individual stocks.

And have patience: “The stock market is a long-term investment, it is not a get-rich-quick scheme,” McBride says. “You have to have the discipline to hang in there when markets get volatile. Over time, you are rewarded for that risk with high returns, but you [have to] hang on through thick and thin.”

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Rebalancing: A simple, if unappreciated, way to enhance investing

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The bull market in stocks has been running for nearly eight and a half years — one of the longest upward stretches ever. Have you rebalanced your portfolio lately?

You might want to think about rebalancing to lower your risk and possibly improve performance. This buy-low, sell-high approach can help you stick to a plan and overcome harmful psychological tendencies.

Yes, psychological. Rebalancing can be an effective way to deal with greed, fear and indecision.

“Consistent rebalancing is a reliable, and often underappreciated, source of higher risk-adjusted performance for the patient investor,” wrote Brent Leadbetter and two colleagues at investment firm Research Affiliates in a recent report.

It can help investors overcome the natural tendency to wait and see before tweaking their investment mix.

How rebalancing works

It’s a fairly simple concept: With rebalancing, you occasionally want to cash in some profits on high-flying stocks or other assets, then reinvest the proceeds in laggards. The idea is to bring your overall portfolio back in line with a suitable long-term mix that’s suitable for you. Rebalancing assumes you have a target mix of stocks, bonds, cash and other investments and want to stick with it.

Suppose you earlier decided that a split of 60 percent stocks/stock funds and 40 percent bonds/bond funds is a good mix. If you’re currently sitting at 65 percent/35 percent, for example, you might want to pull assets equal to five percentage points from stocks and reinvest them in bonds, to get back to that 60/40 position.

Stock prices have tripled since the long bull market began in March 2009. Consequently, you might have a bit too much in stocks, especially as you’re older now and presumably want a less-volatile portfolio.

“The biggest advantage of rebalancing is that it helps you manage risk,” said David Fernandez, a certified financial planner at Wealth Engineering in Scottsdale. “The U.S. stock market has done so well lately that, if you’re not rebalancing, you’ll wind up with a portfolio that’s heavily concentrated in (large) U.S. stocks.”

Behavioral issues

A less-obvious aspect to rebalancing is that it can help investors overcome psychological tendencies that can prove harmful.

Greed is one. As explained by the Research Affiliates report, when investors are sitting on large paper profits in the stock market, they could become susceptible to the “house money” effect. This explains the tendency of casino gamblers on a winning streak to stay too long at the table. So too with many stock-market investors.

Fear of missing out is another. Many of us tend to remain heavily invested in stocks even when it becomes more risky to do so, out of fear that our friends will keep bragging about all the money they’re making if the market keeps rising.

People are “evolutionary wired to follow the herd,” said the Research Affiliates report. That is, nobody wants to feel stupid, or even ostracized, by missing out on big gains.

These behaviors are easier to overcome if we stick to a plan. Rebalancing provides a discipline for taking such actions even when they don’t feel right.

Conversely, rebalancing also provides the justification for keeping at least a toehold in the stock market at all times. It can help you view bear markets not as cycles to be feared but as buying opportunities.

Betting on long-term averages

Still, it can be difficult emotionally to take some chips off the table during a market environment like that of the past eight-plus years, when the gains have rolled in fairly steadily. There’s a natural tendency not to want to sell winners prematurely.

However, rebalancing isn’t the same as market timing, which involves making big shifts into or out of the stock market, usually based on recent trading patterns, valuations or other news or developments. With rebalancing, the changes are more subtle, and they’re focused on getting back to a predetermined allocation or mix.

Rebalancing also involves moving among different investment subcategories. Foreign markets haven’t fared nearly as well as U.S. stocks in recent years and thus could be a good place to move some money, Fernandez noted.

Rebalancing rests on another assumption — that investment returns will tend to fluctuate more or less in line with their long-term averages. This is the concept of “reverting to the mean.” While individual stock prices can fluctuate wildly, the market as a whole has returned about 11 percent annually over time. After a big rally, stocks tend to cool off for a while. After a slump, they tend to recover. 

“A disciplined rebalancing approach continually positions our portfolios to reduce risk,” said Research Affiliates.

In fact, investors who rebalance don’t necessarily give up all that much in gains, even when the market is advancing. For example, the all-stock Standard & Poor’s 500 index generated an average gain of 7.2 percent annually over the 20 years through 2017, noted JPMorgan Asset Management. A 60 percent/40 percent stock-bond split didn’t do all that much worse, returning 6.4 percent a year, but with less risk.

Tips for success

Rebalancing is a simple concept, but there are ways to make it more effective. Here are some tips on that:

  • Rebalancing works best inside Individual Retirement Accounts, 401(k) plans and other accounts where buy/sell decisions don’t trigger taxable gains or losses. If rebalancing would exert a tax impact or result in big trading costs, you might want to rebalance less frequently.
  • You don’t need to rebalance all that often. Many advisers suggest doing so about once a year or after your portfolio has drifted out of whack by maybe five percentage points.
  • Rather than selling assets to rebalance, an alternative would be to earmark new investment dollars or reinvested dividends into stocks or bonds that have lagged.
  • Rebalancing doesn’t work as well with individual stocks or bonds, which conceivably could lose all their value. You want to use broadly diversified funds.

As noted, the flip side to rebalancing is that it can slow your gains during periods of sustained rising prices. But after more than eight years of a mostly upward trend, the odds are increasing for a major, downward shift in direction.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

READ MORE:

  • Don’t know what to do with your 401(k) plan? Consider moving it to an IRA
  • Here’s what economic growth means for your investments
  • Keys to better investing may be hiding in your tax return

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'Am I on a suckers' list after investing £1862 in carbon credits?'

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  1. ‘Am I on a suckers’ list after investing £1862 in carbon credits?’  Telegraph.co.uk
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Investing: It's not that difficult to get the big things right

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  1. Investing: It’s not that difficult to get the big things right  The Guardian
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