Helping You Protect Your Money. Helping You Protect Your Future.
Here’s a puzzler for you.
What are the odds that you’ll be better off over the next 10 years if you hold your retirement portfolio in boring Treasury bills, money-market funds or certificates of deposit rather than if you hold it in a diversified, low-cost U.S. stock index fund?
If you think “no chance,” or “that’s crazy,” sorry, but you have to stay after school.
If you think “1 chance in 50” or “1 chance in 20,” ditto.
Based on the historical record the correct figure is about 1 in 6. At least, that’s how often deposits have beaten stocks over any given 10-year period since the 1920s. Deposits won more than 15% of the time. (With no volatility, either). And if you just look at 5-year periods the odds deposits rise still further. They were a better investment than stocks in more than 23% of 5-year periods. Nearly 1 time in 4.
Oh, and this is looking at the S&P 500 index. Even low-cost index funds will underperform the actual index because of costs, and nearly every large U.S. stock fund with an actual manager will do even worse than that.
The goal here is not to panic anyone, nor to get people to sell their stock funds, nor to predict doom and gloom for the U.S. market. This is simply the historical record and one that should be taken seriously, since history does tend to repeat itself over time.
According to the ancient Greek philosopher Heraclitus, “no one can walk through the same river twice, because the second time it’s not the same river and you’re not the same person.” Boy, has this ever been more true than when applying it to financial history and today’s US stock market trends?
Sometimes, especially for more mature investors, it may feel a little bit like de ja vu. For younger investors, we just don’t know how far the next 5 or 10 years will resemble the past, but we do know that equities, stocks, and other securities can lose value- powerfully and swiftly. So, it makes sense to practice some safety in your portfolio no matter what your age.
Let’s call this a dose of realism to younger investors saving for their retirement who haven’t yet experienced a major market decline in their adult lives. Many of today’s investors have been subconsciously conditioned by decades of Federal Reserve manipulation to think that when it comes to stocks the only way is up. And that is just not true.
These thoughts were provoked by a staggering new survey from money management firm Natixis. Dave Goodsell, executive director of the Natixis Center for Investor Insight, says the median U.S. millennial investor EXPECTS their investments to earn 20% a year, on average, over the long term.
No, really. And those aren’t even “nominal” returns. Those are actual returns that the millennial generation really expects to receive on top of inflation.
And across all age cohorts, he adds, the median U.S. investor expects average returns of 15% a year. Again, on top of inflation.
The actual historical average? Over the past century or so, large U.S. stocks have beaten inflation by less than 7% a year a year—over the long term. To put that in context, it means that over a 20-year period, today’s young investors are overestimating their total returns—thanks to compounding—by a factor of 10.
Goodsell stated in a recent interview that barely one-third of investors in their survey expect real returns averaging less than 10% a year over the long term. Among millennials it’s barely one in 5.
No wonder, when millennials were asked to define financial “risk” in the survey, hardly any considered “losing wealth” (12%) or “not meeting financial goals” (13%). It is true that more than twice as many identified “volatility” as risk, but that contradicts their performance expectations for stocks and other similar investments, and this requires a reality check because if volatility doesn’t actually lead to a loss of wealth, or a failure to meet financial goals, do they truly see it as a “real” risk?
OK, so it’s just a survey. But even if these figures are directionally correct, vast numbers of retirement savers in their late 20s and their 30s are living in somewhat of a La-La land. In fact, the survey was conducted across more than 8,000 individuals in 24 countries.
So, what can millennials do differently with a more direct approach to tackling “real” risk?
Well, one strategy that millennials may not be considering but could benefit from, is a fixed index annuity. These fall into the category that we at Summerlin Benefits Consulting fondly call, “safe money strategies”. Fixed index annuities (FIAs for short) can help reduce risk by protecting the consumer’s savings and growth against down markets while still growing their money at a reasonable rate of return during up markets. Many people may believe the myth that fixed index annuities are only for seniors, however they can be beneficial to younger investors too!
Even though some millennials may want to pursue a more aggressive or riskier method of investing, some level of safety makes sense at all ages. And another benefit to a fixed index annuity is that it provides a set-it and forget-it approach. This can be an enticing factor, especially for millennials or more risk-adverse investors.
The good news, according to Natixis, is that growing numbers of young people are seeking out actual human advice and expertise in this area. About 70% of the millennials in the survey have tapped a human as their financial professional and only 6% relied solely on a “robo adviser.” In fact, only half of millennials surveyed are willing to place their trust in “algorithms,” which may be the best news of all!
Financial Professionals who specialize in safe money strategies for the younger generation will provide a great service for millennials who are seeking to truly diversify their portfolio and take a more realistic approach to plan for their future.
Summerlin Benefits Consulting serves all age groups. We focus on safety in retirement planning and help our clients find the best strategy for them in their current stage of life.
 Dave Goodsell, Natixis Investment Managers, Global Survey of Individual Investors by CoreData Research March-April 2021