These young people today – I don't understand them as investors.
I'm just back from a delivering a series of personal finance sessions on university campuses and much of what I covered was about debt, saving, budgeting and the job market. Investing was discussed as well, and I'm still trying to make sense of what I heard. On one hand, young people are strikingly suspicious of the stock market and resistant to investing in it. On the other, they're not averse to finding a home run stock or two to buy and flip at a profit.
Young investors, you're doing it wrong. Parents, help your kids on this. Rookie investors should embrace the stock market for sure, but not make it all about choosing a few stocks for quick profit.
Investors across all age lines can agree that the stock market can be a nasty piece of work. But as a wealth builder, it works for those who are patient. No one can afford to be more patient than 20- and 30-somethings, who have 35 to 40 years until retirement. The 30-year average annual return of the S&P/TSX composite index through Aug. 30 was 8.2 per cent, including both dividends added to share price gains. Over this period, we saw many market crashes. There was Black Monday in 1987, the 1997 Asian crisis, the 2001 dotcom bubble and the 2008-09 financial crisis. And yet, stocks still delivered strong long-term gains.
Safe investing is a huge challenge today because of low interest rates. Even if stock market returns are lower going forward, and they very well may be, they'd still be well ahead of interest-paying investments. It's a lot harder to reach your financial goals with bonds and guaranteed investment certificates paying in the 2-per-cent range at best than it is with a diversified portfolio of safe choices and stocks mixed together.
Not individual stocks, mind you. Diversification through an index-tracking exchange traded fund or low-cost index fund is the way to go. Failing that, a traditional mutual fund is a reasonable alternative if it holds a broad selection of holdings. That way, you won't live or die by what happens to one or two stocks.
Young investors are the luckiest investors because they have so much time to benefit from the stock market's long-term gains. Let's make sure they don't waste the opportunity.
Rob Carrick