I recently came across a personal finance article entitled “Millennial deficit: 1 in 4 trust no one about money”. The author sites a Fidelity Investments study which surveyed 152 adults aged 25-34 and found that nearly 4 in 10 of these participants worried about their financial future at least once per week. Roughly 33% of those surveyed stated that they trust their parents most for information about money (although many stipulated that they lacked the necessary communication with their parents to effectively have these conversations). Nearly half of the participants said they never received financial advice from their parents. The average millennial investor (aged 21-36) has 52% of their savings in cash, compared to 23% for other age groups .
Millennials; also known as Generation Y, are the demographic cohort born between the early 1980s and early 2000s. This generation is currently under a great deal of study as it will comprise more than one-third of all adult Americans by 2020, and will subsequently make up as much as thee-fourths of the U.S. workforce by 2025). Many Generation Y-ers witnessed their family’s struggles in the aftermath of the Great Recession; and many have had first-hand accounts with the importance of employment, budgeting, and retirement savings. Despite Millenials propensity to save, it is clear that they need guidance. In an effort to be timely and responsive to geo-political uncertainty and market volatility, I’ve prepared some general pointers to help Millenials keep a clear head during a turbulent market.
Have a game plan
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might want to employ buy-and-hold principles for the bulk of your portfolio but keep a small portion of your portfolio free for tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand, optimize, and balance your risk in advance.
Know what you own and why you own it
When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity. And if you don't understand why a security is in your portfolio, find out. That knowledge can be particularly important when the market goes south, especially if you're considering replacing your current holding with another investment.
Remember that everything's relative
Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you've got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are performing in line with those benchmarks, that realization might help you feel better about your overall strategy. Even a diversified portfolio is no guarantee that you won't suffer losses, of course. But diversification means that just because the S&P 500 might have dropped 10% or 20% doesn't necessarily mean your overall portfolio is down by the same amount.
Tell yourself that this too shall pass
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you're considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.
Be willing to learn from your mistakes
Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. Expert help can prepare you and your portfolio to both weather and take advantage of the market's ups and downs.
Consider playing defense
During volatile periods in the stock market, many investors reexamine their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks, and are not necessarily immune from overall market movements). Dividends also can help cushion the impact of price swings.
Stay on course by continuing to save
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not be quite so discouraging. If you're using dollar-cost averaging--investing a specific amount regularly regardless of fluctuating price levels--you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can't guarantee a profit or protect against a loss. Also, consider your ability to continue purchases through market slumps; systematic investing doesn't work if you stop when prices are down. Finally, remember that your return and principal value will fluctuate with changes in market conditions, and shares may be worth more or less than their original cost when you sell them.
Use cash to help manage your mindset
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you've established an appropriate asset allocation, you should have resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you've used leverage, a margin call. Having a cash cushion coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you're positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient. I generally recommend maintaining a cash balance of no less than 10% of the portfolio value.
Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances; wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes.
Look in the rear-view mirror
If you're investing long-term (which you should be!), sometimes it helps to take a look back and see how far you've come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years. Though past performance is no guarantee of future returns, of course, the stock market's long-term direction has historically been up. With stocks, it's important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. Even if you're able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too.
Take it easy
If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class into another. You could put any new money into investments you feel are well-positioned for the future but leave the rest as is. You could set a stop-loss order to prevent an investment from falling below a certain level, or have an informal threshold below which you will not allow an investment to fall before selling. Even if you need or want to adjust your portfolio during a period of turmoil, those changes can--and probably should--happen in gradual steps. Taking gradual steps is one way to spread your risk over time as well as over a variety of asset classes.
Find a trusted, long-term, Investment Advisor
DIY investment management is naturally wrought with emotional impulse and often distracted by daily responsibility. A trusted and experienced investment advisor can help construct the most appropriate portfolio to meet your short and long-term objectives. An investment advisor who understands your risk-tolerance, the emotional elements you bring to your own financial planning, and your overarching goals is best suited to guide you on this path. The right advisor will not only provide you with the personalized financial direction, but also help you weather the very natural (and often healthy) market turbulence along the way.
Please do not hesitate to contact me should have any questions about this article or if you are interested in discussing specifics about your portfolio.
Jason M. Gilbert, CPA/PFS, CFF
 CNBC citation
 UBS 2014, further citation
 Brookings.edu citation
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Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.