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A recent survey from Money Under 30 reveals that 61% of millennials think now is a good time to invest, even as the coronavirus recession grinds on. Are those youngsters crazy, or are they on to something?
The oldest millennials are about 40, which means they still have 20 years or more to build their retirement savings. They’re not crazy to see opportunity in this market, as dicey as it is. Anyone whose investment timeline can be measured in decades should be investing now.
If you plan on retiring this year or within five years, a millennial-inspired approach might be exactly what you need. This is particularly true if you’re worried about not having enough money saved to fund the lifestyle that you want.
Here’s why: Get too conservative with your retirement portfolio, and you miss out on real growth opportunities that could increase your long-term solvency. Cash yields max out at about 2% annually, while a conservative portfolio might produce long-term average growth that’s three times higher. Of course, the cash yield is guaranteed, while your investment portfolio’s growth is not. It could even be negative for two or three years right out of the gate.
The good news is, you don’t have to choose between those guaranteed cash yields and the opportunity for higher growth. With a little forethought, you can have both — cash on hand and millennial-inspired growth. You can do it by slicing your nest egg up into three buckets, and using a different investment approach for each.
1. Cash and cash equivalents for the short term
Your first bucket is any money you plan on using within the next five years. If retirement is this year, for example, you’d estimate out how much income you need to supplement your Social Security through 2025. Whatever that amount is, keep it in cash or cash equivalents, like money market funds or Treasury bills. That way, you’ll have an ample store of wealth that isn’t exposed to stock market volatility.
2. Go moderate for the intermediate term
Next, you’ll create an intermediate-term bucket that’s invested to produce stable growth. You could build this yourself by blending bond funds with large-cap mutual funds, but it’s simpler to invest in a low-cost target-date fund. Look past the fund’s target date and focus on its asset allocation. A conservative choice would be one that’s comprised of 50% to 60% stocks, with the remainder in bonds.
3. Long term, think like a millennial
And finally, you can invest the remainder of your portfolio like a millennial. This is your long-term bucket, which you shouldn’t have to tap into for 15 years or more. That timeline gives you the freedom to be more aggressive in your choices. An S&P 500 index fund is a reliable option, though you could also add some exposure to international equities, small caps, and mid cap stocks, too. These will show more volatility than the remainder of your portfolio, but that comes with higher growth potential.
4. Refill your buckets
The big challenge in creating time-based buckets within your portfolio is deciding when to refill those buckets. You could do nothing and simply draw from your cash stores first, then your intermediate-term bucket, and then your long-term bucket. That might be good for your returns, but it does mean that the risk in your portfolio will increase over time. On the other hand, if you liquidate your longer-term assets to refill your cash bucket every year, that defeats the purpose of having buckets at all. You’d be better off reducing your cash balance and living directly off your portfolio.
The middle ground is to wait for opportunities to take profits on your riskier assets, and then use the proceeds to adjust how much you have in each bucket. In practice, that might mean you make no adjustments for several years as the market works through this recession. Once the economy stabilizes, you’d reevaluate where you stand, cash in on unrealized gains, and refill your buckets as needed.
Invest aggressively, but only with some of your nest egg
Your retirement timeline is shorter than a millennial’s, but that doesn’t mean you’re done building wealth. As long as you set aside the funds you need in the short-term, you can afford to be more aggressive on a portion of your assets. That way, you can still participate in market upswings, but in a way that limits your overall risk.