Today, I read a deeply concerning statistic in an article from Forbes.
It stated that 52% of all the money in a typical millennial’s portfolio is tied up in cash, according to a 2014 survey by investment bank UBS.
54% is a huge number when U.S. and European interest rates are at below, or very close to zero.
For the record, you’re a millennial if you’re currently aged between 21 and 36.
Further to this startling number, UBS’ survey found just 28% was typically invested in stocks and the remainder would be in fixed income or ‘other’.
UBS’ study was conducted in the Americas.
But I think it’d be safe to assume many young Australians are in a similar position.
Either way, if you’re a millennial, having greater than 50% of your portfolio in cash could come back to haunt you later in life.
As Dr Shane Oliver of AMP Capital wrote earlier this month, the local share market would’ve turned $100 invested in the 1920s into $1,638,400 today, if profits were reinvested.
That represents a compound annual growth rate of 11.6%.
For comparison cash has returned a measly 5.6% per year, bonds around 7% and Australian property achieved a yearly compound rate of 11.1%…
By now I’m guessing you can see why cash could be a wealth destroyer for young Australians.
Here’s how you could retire with 100% more
To illustrate the real-life impacts of this let’s take two 25 year-old Australians and run a quick forecast.
The first individual has 50% cash, 30% shares and 20% in bonds – just like the survey found.
According to the historical rates above, the average annual return on the portfolio would likely be around 7.65%.
However a popular rule of thumb used by advisors is for young investors to weight their portfolio in shares according to a simple bit of arithmetic: 100% minus their age. For our second individual that’d mean putting 75% of the portfolio in shares.
With 75% in shares, 15% in fixed income or bonds and 10% in cash, the expected annual returns would be 10.24%.
That doesn’t sound like a big difference does it?
Here’s what it means…
Let’s assume both of our individuals have $10,000 to invest today and will add $500 per month to their portfolios with the intention of retiring at age 65 (i.e. 40 years from now).
Here’s what the first individual could expect to have when they retire.
As can be seen from the above, under those assumptions, our first individual would have slightly over $1.6 million in his or her portfolio.
Our second individual – with more money invested in shares – would expect to receive significantly more.
From just a slight tweak in our asset allocation mix the difference is almost 100% more in retirement for our second individual, assuming 75% invested in shares.
5 stocks to get you there
The evidence is out there, having excess money in cash or savings accounts is dead money.
Of course, it’s always prudent to have some cash in case of emergencies and unforeseen events. But if you’re prepared to go without a sum of money for, say, three to five years it might be worth transitioning it into higher returning asset classes like shares.
Remember too, shares are more liquid than property. They also do not require you to take out a big margin loan (pardon me, “mortgage”) to get involved in the market. And whilst the main factor blocking most young Australians from getting involved in the sharemarket is a lack of knowledge, you don’t have to get a fancy university degree to invest successfully.
A bit of reading, analysis of the risks, and a good temperament is all that’s needed.
Computershare Limited (ASX: CPU) – a share registry business – and conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) are two more great stock ideas for younger Australians to own over the long term. Heck, even the mighty Telstra Corporation Ltd (ASX: TLS) could be worthy of a second look.
Anyone looking to enter the share market for the first time should do a little reading on the strategies of famous long-term investors like Warren Buffett, Charlie Munger and Peter Lynch – to get a sense of what it takes to be a great investor.
Try and discover for yourself what they look for in their investments and search for their worst mistakes.
Then, try your hand on the market.
5 stocks under $5
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Motley Fool contributor Owen Raskiewicz owns shares of Coca-Cola Amatil Limited, Computershare, Washington H. Soul Pattinson and Company Limited, and Woolworths Limited. He is also long June 2016 $5.197 warrants in Coca-Cola Amatil Ltd. Owen welcomes your feedback on Google plus (see below) or you can follow him on Twitter @ASXinvest.
The Motley Fool Australia owns shares of Computershare. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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