Millennials Don’t Trust Investment Advisors — Here’s A Solution

Millennials Don’t Trust Investment Advisors — Here’s A Solution

Scottrade conducted a survey of investors and found that the younger they are, the less likely they are to trust investment advisors, MarketWatch writes.

Mitch Tuchman tried to help an investment advisor who was concerned that a client who had shied away from the stock market over the past three years, and had missed out on big gains, wanted to jump in now.

How are those two items connected?

They both point to how people are skeptical about financial advice, but also how they are not naturally inclined to make good investing decisions.

Scottrade surveyed 1,030 adults who had at least $2,500 in investments.

The study concluded that 80% of people in the millennial generation wish they had “access to trustworthy retirement investment guidance,” with those numbers falling to 72% for Generation X, 49% for baby boomers and 30% for seniors.

Another area where younger investors stand out is their mistrust of investment advisors.

Among millennial participants in the survey, 67% think their advisor “sometimes recommends products and solutions that are in their advisor’s own best interest,” with the percentages declining to 64% for Gen. X, 22% for baby boomers and 15% for seniors.

But there is plenty that younger investors can do to get over the trust hump.

This is where Tuchman’s advice to the advisor, whose client stayed out of stocks since 2013, comes in.

He said the advisor should suggest the client move his money into stocks in an orderly process, with a set amount of money on a set day each month, for the next 12 months.

That way, the investor would be less likely to get hurt if the market were to fall during that period.

This would make panic selling and losses much less likely.

Lower risk, lower expenses, better performance

Do you believe investment advisor are gurus, with crystal balls enabling them to make stock picks that outperform the broader market? It isn’t likely.

There is a limitless supply of data showing that passive investment strategies — index funds — tend to outperform active money management strategies.

Even if an investment manager beats the market for a certain period, the fees paid to the manager, plus other expenses, can lead to below-market performance in the long run, as Berkshire Hathaway Inc. CEO Warren Buffett explained so well in his 2016 letter to shareholders. (See page 21.)

How does this advice relate to your particular investing scenario? If you expect your career to last another two or more decades, making regular investments not only cuts your risk (and your expenses, if you select index funds), it improves your long-term performance.

This is because you pay lower prices for investments made during periods of weakness for the stock market.

This chart below shows the movement of the benchmark S&P 500 Index over the past five years:

FactSet
The index has risen 71% over the past five years, but it hasn’t moved in a straight line.

In the past two years, there have been two 12% declines that were followed by rapid recoveries, after which the index climbed to new highs.

You might have been upset if you had made a major investment right before one of those dips.

But if you were making regular investments every pay period, your return would have been improved by paying lower prices during those down periods.

Meanwhile, you would have enjoyed freedom from picking stocks, the lower risk of the great diversification of an S&P 500 index fund and low annual expenses.

For example, the Vanguard 500 Index Fund has annual expenses of 0.16%, according to the fund’s prospectus.

You can invest in index funds directly with Vanguard and other low-fee mutual fund managers.

Of course, over time, a stock fund may no longer be the best investment for you, as your goals change.

This is when a financial advisor can be helpful.

As you get closer to retirement age, your primary investment objective may no longer be long-term growth.

It might be capital preservation or current income.

Icing on the cake — free money

If you are fortunate enough to work for an organization with an employer-sponsored, tax-deferred retirement plan, you can make regular pre-tax contributions into investments that hopefully include index funds among the choices, and your employer may make matching contributions up to a certain limit.

For example, an employer may offer to match your contribution up to 3% of your salary.

This means if you put in 3% annually, your employer puts in the same amount.

Leaving out the possibility that contributions may take some time to be vested, you’re getting a 100% return on each contribution you make.

Over time, you can, and should, increase your contributions as your salary increases.

Even if the employer’s match is relatively modest, compared to your total contribution, it can make an amazing difference in the long run, as is explained in great detail here.

Many people don’t take advantage of these plans by at least contributing enough to get the employer match, and are therefore leaving money on the table — free money.

So either way, with an employer-sponsored plan, or not, you can participate in the stock market while minimizing risks and expenses, by making regular contributions that you can afford.

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