3 good reasons to invest more aggressively in your employer's 401(k)
Young investors and stocks may be a good match when it comes to potential financial growth over the long haul. Learn why you might not want to shy away.
Younger investors generally have three or more decades to earn money before retirement. Yet many young people choose to keep most of their money in cash — emphasizing near-term stability over long-term growth potential.
In a 2011 survey from MFS Investment Management, 40 percent of Generation Y respondents (people between ages 18 and 30) agreed with the statement, "I will never feel comfortable investing in the stock market." Some 30 percent of respondents said their primary objective was simply to avoid losing money.
"That may be a mistake," says Robert Payne, a financial professional with The Principal Financial Group® in Greensboro, N.C. At a younger age, there are potentially more opportunities on your side for long-term financial growth.
Why does it make sense for Gen Y to consider investing more aggressively? Here are three key reasons:
1. Time is on your side.
Stocks historically have generated stronger returns than other assets over long periods. What's more, the risk of losses in stocks declines dramatically the longer they're held. Over a 20-year time period, stocks have traditionally gained ground — this is based on performance dating all the way back to 1926. "If you're a young person, the potential for needing that money could be 30 or more years away, so it may benefit you to stay invested in the market," says Payne. "Stocks have historically done well over periods that long."
2. "Safe" money isn't safe from inflation.
The dollar value of money in savings accounts doesn't decline, making these vehicles seem safe. But inflation consistently erodes the purchasing power of that money — and over time, the effect can sometimes be more powerful than a market decline. Consider that a historically average 3 percent inflation rate will cut the value of a dollar in half in 24 years.
Accounts that pay a fixed interest rate may actually lose ground after inflation. On the other hand, stocks historically have outpaced inflation, sometimes by a wide margin. It's important to keep in mind that investment options are subject to investment risk. Shares or unit values will fluctuate, and investments, when redeemed, may be worth more or less than their original cost. It's possible for an investment option to lose value.
3. Your plan can change.
The Principal can help educate you on investment risk so you can be a more informed decision maker. Once you have an understanding of investment risk and your tolerance for it, choosing investment options may be less stressful. Consider taking our investor profile quiz as part of your decision-making process. Another alternative may be a target date fund (providing your organization makes one available). Based on your review of these plans, you can elect a target date fund closest to the year you plan to retire.
Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither asset allocation nor diversification can assure a profit or protect against a loss in down markets. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation. Should you choose to retire significantly earlier or later, you may want to consider a fund with an asset allocation more appropriate to your situation. Neither the principal nor the underlying assets of the target date funds are guaranteed at any time, including the target date. Investment risk remains at all times.
Even if you choose the right mix of investments, it's also important to make sure you're investing enough. "You can't guarantee a certain return, but you do have control over the amount that you save," says Payne. "The most important thing you can do is to set a realistic savings goal, and stick with it."
Use our interactive retirement planning tool to see how varying rates of return may affect your retirement, and to track your financial goals and progress along the way.
- Ibbotson Associates SBBI 2012 Classic Yearbook
Investors should carefully consider a mutual fund's investment objectives, risks, charges and expenses prior to investing. A prospectus, or summary prospectus if available, containing this and other information can be obtained by contacting a financial professional, visiting principal.com or calling 1-800-547-7754. Read the prospectus carefully before investing.
Investment options are subject to investment risk. Shares or unit values will fluctuate, and investments, when redeemed, may be worth more or less than their original cost. It is possible for an investment option to lose value.
Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise.
Asset allocation does not guarantee a profit or protect against a loss. Investing in real estate, small-cap, international, and high-yield investment options involves additional risks. Additionally, there is no guarantee an asset allocation investment option will provide adequate income at or through retirement.
Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.
Neither the principal nor the underlying assets of target date investment options are guaranteed at any time, including the target date, and investment risk remains at all times.
No investment strategy, such as diversification or asset allocation, can guarantee a profit or protect against loss in periods of declining values.
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, Member SIPC and/or independent broker dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.