“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
In Willy Wonka and The Chocolate Factory, Grandpa Joe says the best place for your money is under your mattress. After watching the 1929 stock market crash, Grandpa Joe formed opinions about investing that would stay with him the rest of his life. He was a “Depression Baby.” Now, after witnessing stock market crashes in 2000 and 2008, many Millennials have been heeding Grandpa Joe’s advice.The stereotypical young person is a risk-seeking gunslinger who doesn’t merely invest; they trade hot stocks. This image requires an update for the new reality:per UBS, Millennials hold more than half their assets in cash.
However, inflation is slowly ripping apart the seams of that money mattress.Inflation is one of the most sinister opponents to our wealth. It does not show up on our bank statements. It does not appear on receipts or invoices. It only shows up in the consumer price index. Here is exactly what it looks like:
At first glance, a chart that is moving up so consistently would appear to be a good thing. When you realize this is a chart of our everyday necessities, reality sets in. Remember that dollar that Grandpa Joe hid in his mattress in 1970? Now, it’s only worth 17 cents. That’s not the golden ticket of safety he thought it was.
Inflation shows up in real prices. In 1970, you could buy a box of corn flakes for 38 cents. Now, it costs three dollars. Movie tickets were $1.55 in 1970. When is the last time you paid $1.55 for a movie? Now, it could set you back $8 or more. Surely, a dollar will always be a dollar, but good luck trying to do anything useful with it in 20 years. Movie tickets will be $20 or more. Inflation is why Grandpa Joe’s mattress investment strategy was doomed. Unfortunately this hasn’t stopped well-meaning Millennials from following his example.
In investing, the actions our emotions naturally drive us to are usually the wrong ones. When you’re afraid, it’s easy to sell everything and hide your money in the mattress. It’s much more difficult to ignore the financial news drama and stick to your long-term plan. That’s where having an adviser is invaluable.
How can advisers defeat the allure of the mattress and get Millennials out of their financial bomb shelters? It is not an easy task. Even when advisers convinced Millennials to invest for growth, only 11% of them said they were comfortable with it.
Perhaps the real problem here is that most Millennials (and most people, period) don’t have the benefit of a solid financial education. They think the only options are being totally risk on or totally risk off. While stuffing cash in the mattress may seem like a “risk off” strategy, inflation turns it into a “risk on” idea, except there is no reward to justify the risk – besides the additional padding it provides to your mattress. Yes, the market can decline for long periods of time, but it has always recovered. Yes, markets rise and drop and those drops can seem very scary.
Even with all the ups and downs, per Wharton professor Jeremy Siegel in his book “Stocks for the Long Run”, stocks have returned an average of 6.5 percent to 7 percent per year after inflation over the last 200 years. Yes, that’s 200 years.
While of course there are no guarantees going forward, that’s a pretty compelling long-term track record. Inflation in things we buy, on the other hand, doesn’t adjust. For the most part, it just keeps climbing.
By working with an adviser, Millennials can invest in a way that helps to manage that risk. Additionally, advisers can help ease investor’s minds by providing needed education on markets, cycles and how market psychology works. Show Millennials the long-term stock market charts next to the long-term inflation charts. This can help them put the “scary” volatility into perspective.
Millennials who avoid the market face a staggering opportunity cost.
If they don’t start investing now, they will miss out on enormous compounding gains in the future. Investing for retirement is dramatically easier when time is on your side. Not taking advantage of time at an early age is a choice many will likely regret later in life.
With life expectancy increasing and interest rates at historic lows, it takes assertive action to get a decent return on investment. Fortunately, these are risks that Millennials can afford to take.
On the other hand, not investing in the market at all can come with a huge price. Inflation has been on a steady unrelenting climb higher for years. That’s why Grandpa Joe’s strategy might just be the riskiest move of all. His 17 cent-dollars pretty much says it all.
By helping Millennials’ understand the large opportunity cost at stake, financial advisers can show them how investing in the market long term really is less scary than investing in their mattresses.
Jeanne Klimowski is founder of Wavelength Financial Content Inc., a firm that provides marketing content and financial wellness solutions to financial professionals. Contact us for more information about how content can help your firm stand out online.