Wall Street records leave Main Street behind

Jeff Macke

Stocks hit yet another record high on Wednesday but most Americans are missing out on Wall Street’s party. A Gallup poll released Monday revealed that 72% of those with less than $100,000 prefer to invest in low risk, low reward assets rather than seeking higher potential gains. Those in the “saving years” between 18 and 44 are just as likely to avoid risk as those approaching retirement.

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According to most financial planners, young people should have more risk tolerance as they begin saving towards retirement. The risk aversion of young Americans has been costly over the last five years as low interest rates have hit conservative investors and helped push the stock market more than 120% higher.

Justified Caution

The last 15 years have been a roller coaster for investors who came of age during the dot-com bubble and saw the global economy nearly collapse at the end of the last decade. As Lauren Lyster notes in the attached video, the glacial pace of the economic recovery hasn’t left young investors with the luxury of taking risks with their investments.

“Beyond the unemployment, so many people are struggling with stagnant wages, part-time work and things that just don’t allow them to save.” Lyster notes that people with little more than one month worth of savings can’t afford to house their money in a stock market that’s proven to be anything but stable. Those with so little to fall back on “need the optionality of having that cushion in cash. What happens if something goes wrong?”

A crash for the 1%?

If there is an upside for those who have missed out on the rally it’s that they won’t get hit as hard when the long-anticipated day of reckoning comes for an economy built on artificial stimulus and paper gains. Unfortunately the price being paid for avoiding the the next crash is huge.

A stock market collapse is hypothetical but age is one of the few certainties in life. Most Americans aren’t saving nearly enough to retire and locking in savings at a risk-free rate of 3% won’t leave much of a retirement fund by the time you turn 65.

It’s been a brutal ride but for the last decade stocks have returned 9.1% compared to less than a historically high 4.7% for 10-year note. A $10,000 investment in stocks made ten years ago would have doubled compared to about a 50% gain in risk-free assets. Over 25 years the average buy-and-hold stock investor has ended up with a nest egg nearly 3x the size of a risk-free investor.

That math is likely to make frustrated Americans who have been sitting out this rally even more angry than they already are.

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