Being a Detroit Lions fan is tough. (Whether you're a Lions fan, or even a sports fan at all, bear with me for a moment - this analogy is quick and it serves an important purpose.) With the Lions, something always seems to be missing.
Conversely, a successful team starts the game with a balanced attack of running and passing. If the team gets behind, they tend to take on risk by passing the ball down the field more hurriedly in an attempt to score points quicker. As Lions fans, we know all too well how this strategy shakes out. More risk doesn't always mean more reward.
In my previous column, I explained the challenges stacked against Millennials and our finances.1 We have accumulated less wealth than prior generations and we have exponentially more student loan debt. We also cannot rely on the system to care for us: pensions have all but disappeared and Social Security and Medicare will almost certainly not provide for us the way it takes care of today's retirees.
We are told that we must take on risk to overcome these challenges. This conflicts with our nature because Millennials "are the most risk averse generation since the Great Depression."2 Based on our experiences with the stock market and financial institutions so far, we can't be blamed.
Millennials and 401ks
Conventional wisdom tells us that we are young and time is on our side. According to this line of thinking, we should max out our 401k and otherwise invest as much in the stock market as possible. This way, we're told, we can achieve a rate of return and be able to retire in 30 years. Although utilizing a 401k may be an important factor, this strategy alone may not be a good fit for our generational goals.
It's not that we're overly inclined toward instant gratification compared to other generations,3 but we are not content to stay on the treadmill for some fuzzy vision of the future. Instead, we are currently building our lives, and need money now to help us start a family, buy a home, develop a business, and invest in a new technology. Except for a few exceptions or the potential ability to take loans, money invested in a 401k is generally not liquid for these purposes.
Developing Your Own Balanced Attack
Of course, the 401k and other stock market investments play an important role in a diversified strategy. But if that was the ONLY strategy it would be like launching the ball down the field on every play. Just ask the Lions how it's worked out since Barry Sanders retired and they've been without a meaningful run game.
In personal finance there is no one product or investment that serves every need. For example, stock market investments (including the 401k and other retirement accounts) provide historically long-term rates of return, tax deferred accumulation, and are easy to manage. But they can't do everything. There are inherent risks in investing, not only stock market risk, but tax risk and liquidity risk. And these investments work better when the investor continues to fund them over time, which may be difficult if someone becomes ill or injured.
Therefore, just like the football team's balanced attack, Millennials should seek financial opportunities that provide complementary benefits to the stock market. Because we may need more money in retirement in order to overcome the challenges unique to our generation, including the potential reduction of government benefits. Although we may need more money, we are averse to simply taking on more risk.4 The good news is that we can achieve our goals, both short-term and long-term, by diversifying how we save our money. There is no magic bullet, but your financial advisor can help you develop your well-rounded offensive attack.
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Footnotes
1Kyle Zwiren, Oakland County Legal News, Millennials and Their Money: Compounding Challenges, published Nov. 22, 2019, http://www.legalnews.com/oakland/1481609.
2Dan Moskowitz, Investopedia, Are Millennials Risk Averse or Risk Takers?, updated Jun. 25, 2019, https://www.investopedia.com/articles/investing/070815/are-millennials-risk-averse-or-risk-takers.asp.
3Alix Langone, Money.com, This Chart Shows How Much Millennials, Gen X and Baby Boomers Have Saved for Retirement. http://money.com/money/5640466/this-chart-shows-how-much-millennials-gen-x-and-baby-boomers-have-saved-for-retirement-see-how-you-compare/, Apr. 3, 2019.
4See Dan Moskowitz, Investopedia, Are Millennials Risk Averse or Risk Takers? updated Jun. 25, 2019, https://www.investopedia.com/articles/investing/070815/are-millennials-risk-averse-or-risk-takers.asp.
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Want to talk to Kyle about this or other topics featured in The Economic Blueprint? Please email him at kzwiren@ financialarch.com or call him at 248-482-3622. Zwiren works with Financial Architects Inc., an independently-owned company located in Farmington Hills. Zwiren and his team serve attorneys and other professionals to help them design financial plans in line with their goals and based on optimal efficiency. Zwiren practiced law prior to becoming a Financial Architect and left the practice to follow his passion. He is a registered representative of and offers securities through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way, Cincinnati, OH 45242; 513-794-6794. Investment Advisory Services offered through O.N. Investment Management Company. Financial Architects Inc. is not a subsidiary or affiliate of The O.N. Equity Sales Company or O.N. Investment Management Company.
The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as investment advice. The above links to articles are provided for your information strictly as a courtesy, and does not constitute an endorsement for the presented strategies or opinions. We make no representation as to their accuracy or applicability to your personal circumstances. Before investing in any investment strategy, it is recommended that you consult with an investment advisor to discuss your individual investment objectives and financial situation.
Published: Fri, Dec 06, 2019
