As a younger investor saving for retirement, you have a powerful advantage working on your side: time. With your longer investing timeline, you have the ability to ride out the market's volatility (ups and downs). But recently, younger investors have been hesitant to invest aggressively. In a recent Wells Fargo Retirement survey, 52% of millennials say they are “not very confident” or “not at all confident” in the stock market as a place to invest for retirement.*
The stock market has seen some extreme volatility in recent years and that volatility, combined with the country's general economic challenges, likely contributed to the trend of conservative portfolios among young investors. Historically, though, the market's long-term gains have offset short-term losses. Investing too conservatively may lead to smaller account balances that don't meet your goals for retirement.
Choosing an appropriate asset allocation can help you manage risk while taking advantage of potential market upturns. Each of the major asset classes — stocks, bonds, and stable value/money market funds — responds in its own way to economic and market conditions. When you build a portfolio using funds that invest in all three, positive returns in one asset class may offset a downturn in another. For many people, an appropriate portfolio is more aggressive (more heavily invested in stocks) when they have a longer timeline and becomes more conservative as they approach retirement.
An understanding of the characteristics of each asset class may help you choose an asset allocation that's appropriate for your timeline, goals, and risk tolerance.
Stocks have historically earned the highest returns over the long term (see chart). You may want to include this asset class in your retirement plan account for its long-term growth potential. This asset class has also shown more short-term volatility than the others.
Bonds have historically earned lower returns but experienced less volatility than stocks over the long term.
Stable value investments, such as Treasury bills and money market funds, have experienced the lowest returns but also the lowest volatility of the three asset classes, over the long term.
Are you investing aggressively enough?
The trend is beginning to turn around and young investors are starting to accept more investment risk, a more recent survey shows. U.S. mutual fund-owning households headed by younger investors have returned to a level of financial risk tolerance comparable to the level seen before the financial crisis of 2008.** In 2012, the number of mutual fund-owning households younger than age 35 willing to take above-average or substantial financial risk to get higher investment returns was 39% — up from a low of 31% in May 2010.**
NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE