Millennials were already skeptical of buying stocks. A recent Bankrate.com survey found just 26 percent of people under 30 own them—in part because they don't know much about the market or think stocks are too risky. The massive selloff Monday, which saw the Dow Jones industrial average plunge 1,000 points before closing down nearly 600 points, probably didn't do much to change that.
But advisors caution millennials that avoiding equities could be riskier than staying on the sidelines, since stocks tend to generate higher returns over time than more conservative investments. (Despite the recent volatility, the Dow is still up more than 1,100 percent over the last 30 years.) In fact, this could be a prime time for young investors to jump into the stock market.
"It's a good buying opportunity," said Victoria Fillet, certified financial planner and founder of Blueprint Financial Planning in Hoboken, New Jersey. "We've been waiting for a correction, and when you get a quick and intense market correction it is much healthier than a slow grind down."
It's like a clearance sale.
That's especially good news for millennials. While a dip this low tends to scare people, buying when stock prices fall means you get more bang for your buck. It's as simple as it sounds: When a stock's price is down, the same amount of money allows you to buy more shares. "You're buying whatever you're buying at a better price today than what it was last week," said Kevin Gahagan, principal and senior advisor at Mosaic Financial Partners in San Francisco.
Millennials also have a major advantage over baby boomer and Gen X investors: time. While the market will have its ebbs and flows, millennials have decades ahead before retirement to weather this type of volatility. Advisors say young investors can put as much as 60 to 80 percent of their portfolio into stocks. "At that age, you want maximum growth so you have to grow your money for 30 years in order to use it for 30 years," said Fillet.
How much to put into stocks exactly depends as much on your risk tolerance, though, as your time frame.
The pullback this week is a great reminder to assess your risk tolerance and construct a portfolio that's the right fit. If you felt your anxiety rise as stocks fell, it's a good idea to re-evaluate your tolerance level for a portfolio heavy in stocks. Advisors suggest having a diversified portfolio, with a mix of stocks and bonds, that can weather the waves but also fits your comfort level.
Even among stocks, there are ways to mitigate risk—by buying exchange-traded funds, which are baskets of stocks and can mirror indexes like the Dow Jones industrial average or track sectors, or by looking for dividend-producing stocks from companies that have weathered downturns and produced consistently good earnings. "They will react to the market but they have a repeated history of good performance," said Fillet.
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Sites like Vanguard and Fidelity offer research on specific stocks and funds, and Morningstar provides ratings and analysis of stocks and funds. Financial advisors can also help put together a portfolio that fits your goals.
Once you've assembled your portfolio, don't get caught up in the day-to-day movements of the market, said Gahagan. "Just be an investor and think about your personal time horizon—and part of that is a willingness to ride out the markets."