A recent report appeared to suggest that Millennial investors are holding more cash and bonds than older investors.
In theory, they shouldn’t be holding as much as 45% of their investments in cash and bonds. According to the Rule of 100, they should be allocating around three quarters of their investment to shares, which means that only 25% of their investments should be in cash or near-cash investments such as bonds.
Perhaps it is that higher prevailing interest rates are influencing their decision-making. After all, why would anyone want to take on market risk when they can earn a risk-free return of around 4%? It is a fair question.
For many Millennials, a 4% interest rate on their savings is something that they had only heard about from their elders. It probably isn’t something that they ever expected to experience in their own lifetime. So, why look a gift horse in the mouth?
It would only make sense if we believe that inflation will go away. But here’s the irony. If inflation should come down – and there are scant signs of that happening significantly – then central banks could start thinking about cutting interest rates.
If that should happen, then there is good chance that bond prices could rise. Maybe that is what Millennials are banking on. A bit of capital gains on their bond investment as prices rise. But stock markets could benefit from those rate cuts, too. Put another way, bonds might not outperform shares.
But what if inflation doesn’t go away. It could even stick around for a while. And as long as inflation sticks around, it will continue to erode the purchasing power of the dollar in our pockets. So, locking into bonds might not help.
That said, if we are an older investor, the fact that something that cost $100 today could cost $104 in a year’s time is not going to be that life-changing. But more importantly, older investors don’t have the luxury of time for stock markets to recover if something should go awry.
But it could be different for Millennials, who have a much longer time horizon to not only let their investments recover but to also let those investments grow. And that is important.
Younger investors should try to estimate the returns that they require to achieve their financial goals long into the future. It is highly unlikely that piling into investments that yield 4% is going to do that adequately.
Instead, assembling a portfolio of investments that includes a healthy exposure to shares is probably the best way grow our investments. We can always adjust the components of the portfolio to suit our risk tolerance, which is the beauty of managing our own investments.
We should aim to be in total control of our own financial goals, which in my case means to be salary independent. I can now afford to choose to do what I want, when I want to do it, and with whom I want to do it with.
We only need to know three things to make that happen. And what exactly are those three things? You can find out here what those three life-changing things are.