Investing Advice from an Old Codger for the Working Youngsters Among Us ... You Just Don't Get It .... The Effects of Inflation Over Time Need to be Taken Into Consideration

Inflation isn't a problem these days and probably won't be for many years to come. In my view, the bigger risk is deflation and that augurs poorly for borrowers.


That said, the results that matter to long term investors over time are real inflation adjusted results and not nominal returns. In that regard, the evidence is clear: stocks after inflation beat cash equivalents by at least 6% annually.


Relative to zero real returns, that means a doubling of the initial amount invested each 12 years, when $1 becomes $2 in the first 12 years, then that $2 becomes $4 after 24 years, the $4 becomes $8 after 36 years and the $8 becomes $16 after 48 years.


So here's the math quiz: Which in real inflation adjusted terms is greater? $16, $8, $4, $2 or $1? 'Nuf said.


The only really legitimate way to accumulate real assets over a working career is to save regularly and invest those savings in assets that will earn greater than the rate of inflation over time. Today that's stocks and pretty much only stocks, at least for individual savers and investors.


With the bursting of the real estate bubble a few years ago, the leveraged residential real estate investment became widely recognized for the risky gamble, if not fiction, that it was. Throw in home equity borrowing and the mess was made even worse.


So how are our young people saving and investing their money today? In the wrong places, as a general rule. Although admittedly risky (what isn't?), stocks are the only way to win over time for savers and investors. And the youngsters among us have decades to prove the point to themselves, if only they will get started.


That said, Risk-Averse Youth paints a troubling picture of the habits of today's younger generation:


"Millennials, contrary to public opinion, are prudishly conservative investors, not the “lazy, entitled narcissists” of lore. But they sure could learn a thing or two from their elders about investing. . . .


In a study conducted by UBS, of some 1,600 affluent and high net-worth investors, Millennials kept a startling 52% of their portfolio in cash, with 7% in fixed income, and just 28% in stocks (the remainder is a catch-all category, including alternative investments and commodities, labelled “Other”). By itself, unreasonably conservative, but particularly so when stacked against the average asset allocations of non-Millennials, ages 37-plus, who kept 23% cash, 15% in fixed income, and 46% in stocks.


“The Next Gen investor is markedly conservative, more like the WWII generation who came of age during the Great Depression and are in retirement,” UBS concluded.


Having come of age during the financial crisis, a deep skepticism of the stock market seems to be behind their preference for cash piles. UBS asked, “How did you, or do you, plan to achieve success? Please select up to three most important factors.” Millennials chose a few obvious factors, like “working hard” and “saving/living frugally;” only 28% picked “long-term investing,” their second to last choice. Investing for the long haul was the top selection of 52% of the non-Millennials. . . .


What they don’t realize, perhaps, is that their second largest asset class –“cash, CDs, and money markets”—are earning negative returns after inflation, slowly eroding their nest eggs. Over the past 141 years, equities on average have returned 6% annually, after inflation. That data even includes the most recent financial crisis and the Great Depression. (Millennials wanting to better understand why, historically, investing in the stock market is wise, should read Barron’s recent cover, “We Were Right!”)


So how should an aspiring Penta millionaire be positioned for the future? One simple tip is to learn from his or her elders. TIGER 21 is an organization of 240 investors, each with an average $23 million in assets and 30% of whom are finance professionals still actively managing assets for clients. On a monthly basis, TIGER members get together for a workshop named “Portfolio Defense,” whereby 10 to 14 peers sit down to discuss, or perhaps a better word is “criticize,” each other’s asset allocation.


Contrary to the hunkering Millennials, TIGER members are ratcheting up the risk continuum. Their allocation to risky assets—public and private equity— has become an overwhelming portion of their overall portfolio, now at 73%. . . .


Millennials have largely missed the stock market recovery these past few years. When an old codger starts wheezing on about investing in the stock market, a better strategy – to rolling eyes – is actually listening to what he has to say."


Summing Up


Here's what I say to the youngsters among us who are keeping their savings in cash equivalents while worrying about the risk of owning stocks over time.


You're being foolish. $16 is greater than $1.


But there's uncertainty and volatility involved along the way.


Still, in order to earn real returns in investing, it's just like stealing second base in baseball.


First you have to get on first (get a job and start saving).


But even after getting to first base, you can't steal second with your foot still on first (invest those savings in stocks).


And if you don't get to second, you'll never score a run (income security when reaching old codger status).


That's this old codger's take.


Thanks. Bob.