The last month or so wreaked some serious havoc on retirement accounts. The good news is that the markets have more or less bounced back. Even if they hadn’t rebounded so quickly, it seems like everyone’s advice was to just sit tight and wait for your portfolio to recover. But while millennials and other young investors might think time is on their side, the last few weeks may have done more damage than they realize.
All things being equal, more volatility is bad for your portfolio. August, or the whole summer, may have shown that markets are riskier than we thought they were and that intense volatility is here to stay. If so, time alone won’t save your investment account.
So what does this mean from a practical perspective? In the short run, big swings hurt investors because they make it hard to know when to cash out. If you need your money in the middle of a tumultuous period, you run the risk of selling when your investments have lost a lot of value.
But swings are also problematic in the long run. Advisors like to tell young people that they should take on more risk, typically in the form of stocks. The thinking is that millennials can afford to be more aggressive with their money because they have a long investment horizon, and time heals market swings. But that argument presumes you only have one goal: to avoid losing any money. Yes, investing over a long period of time lowers the odds you’ll end up in the red. But that doesn’t mean you’re safe.
Ultimately, what matters is how much money you’ve accumulated when you retire, not how much you haven’t lost. And here’s the problem with looking at short-term fluctuations as no big deal if you plan on being in the market for a while: You’re actually more exposed to risk. Thought of another way, if you were investing only this year, you’d be exposed to one year of risk. Not retiring for 30 years? That’s 30 years of risk exposure. While more time in the market decreases the risk of losing a small amount of money, it also increases the odds of losing lots of money. And what’s worse, losing $100 or $100,000? If markets are more volatile now, that risk just got bigger. Then add in that markets may continue to get more volatile and you’re looking at heaps of risk.
Then there’s the problem of compounding losses. Young investors in a down market could see their portfolio almost completely wiped out for a few years. When the markets hit bottom and recover, you’ll be working with less money, so you will still end up with a below-average return over the full time you’re invested.
Milennials should be wary of advice that tells them time negates market swings and encourages high-risk investing. It’s true millennials may be more suited to having lots of stock exposure, but only because so much of their wealth is tied to their future wages, which behave like bonds. Fortunately, it’s not too late. While an older investor doesn’t have much he can do about the markets today, a young one can try to develop strategies to mitigate risk and prepare for volatility. It’s always a good idea to think carefully about how much risk you are comfortable with, and when in doubt, opt for a diversified asset plan. Good luck.