Can Investment Fears Put You at Risk of Dying Broke?
Matt K. Logan CFP®
Financial experts are seeing a direct correlation between the increasing number of Americans who die broke and today’s emotionally driven approach to savings and investing. Significant sociological dynamics throughout the years that affect baby boomers (people born between 1946 and 1950) and the Generation X population (people born between 1965 and 1984) has been recognized as a having a major influence on the relationship these individuals and their children have with money and the narrowing of stock market investments.
Based on a recent study by MIT (Massachusetts Institute of Technology), Dartmouth and Harvard University economics professors; at least one in two Americans has zero financial assets or less than $10,000 when they die. And, many people surveyed revealed that the increasing frequency of calamitous events in our modern world create the uncertainties that fuel fears of putting savings into the stock market. A look at global events as these generations merged into adulthood may also help to explain some of the investment fear inducers and hindrances to saving such as:
a) The economic meltdown of 2008 that initially derailed the entire financial sector of the United States before spreading to markets overseas. Large and small companies as well as people who relied heavily on credit were deeply affected.
b) The burst in the real-estate bubble delivered a direct hit to the emotional and financial security of many with new home loans or people coming close to paying off mortgage loans. Fears about losing their homes and the actual loss of housing triggered by this meltdown literally wiped-out life-savings. This also resulted in the accumulation of new debt to meet financial obligations such as relocation, car loans and health issues among others. These setbacks naturally shifted the focus from concerns about solvency in the retirement years to meeting the demand of daily living. This also curtailed rather than spurred saving and investment decisions.
c) Staggering increases in educational costs pushed many parents and their college age children into debt. Federal Reserve Bank of New York economist Meta Brown reported that at least 29% of baby boomers admitted that they took out education loans and double that number of new college graduates said their education was mostly financed by student loans. The effect of this spike in student loan debt also created a significant shift in attention from savings and investment to debt reduction and survival.
d) Vilification of wall-street through negative media coverage has also been attributed to creating deep-seated mistrust of the stock market and stock market investment resistance. Surveys indicate that more than 1,400 millennials reportedly consider the stock market to be “risky”. This lack of confidence has caused even those with the ability to make long term investments for their future shy away from exploring these opportunities. Also, more people saw stock market investment as a short-term financial option of five years or less rather than as a long-term investment strategy. Unfortunately, this view usually subject short term investors to higher volatility rates.
Overall, the accumulation of down turns in the economy, civilian unemployment, spikes in cost of living and fears about changes in the political arena has diminished interest in stock market investments. The following debt to balance graph from the Federal Bank of New York highlight these changes that influence fears about investing in the stock market.
The bottom line is that a bent on avoiding risk leave many people dependent on meager savings, CDs and money market accounts which alone; may not be sufficient to provide sustainable long term income. As such, financial experts are concerned that the effect of fear can turn out to be disastrous for people as they age. They suggest doing a retirement evaluation to get an idea of how long it will take before you run out of money based on current savings, projected inflation and current investment strategies.
Historically, stocks have been a major producer of long-term gains that provide above average financial security for investors. In fact, large stock investments have returned an average of 10% annual returns since 1926. Cumulative financial data that track investment outcomes also suggest that long term stock investments provide the best chance to survive inflation and an edge over short-term investments or low returns from savings accounts.
Learn more about the benefits and potential risks of long and short term investments, annuities that are designed to pass some risks onto insurance companies, surrender periods, participation rates and annualization. A good understanding of the pros and cons of investing in the stock market may help to reduce fears and provide more options for greater financial security during the retirement years.
Matt Logan Inc is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice.