Make sound investing decisions at any age



Peer into the future

If they realized their precious youth was fleeting, more young adults might contribute to a retirement account, researchers have found.

Hal Hershfield, a professor at New York University's Stern Business School, advises 20-somethings to call a grandparent they feel close to or their parents before deciding whether to start contributing to a 401(k).

Thinking about your older relative is a low-tech way of recreating the experiment that Hershfield conducted along with researchers at Stanford University, London Business School and Ohio State University between 2008 and 2011. In the experiment, students were provided a look at their future selves through aging software.

Those who saw their wrinkled, older selves saved about one-third more than those exposed to their current, presumably ever-youthful selves. Calling Gramps or perhaps writing a letter to "your future self" might help a young adult decide to hold out some of his or her paycheck for his retirement account, Hershfield says.


Don't be afraid

What if a 30-year-old did heed advice and enrolled in a 401(k) plan five years ago?

Most financial planners would advise him or her to direct the bulk of the contribution into stocks, since "bonds and cash are not the answer for the long-term growth," says Nicholas Laverghetta, a CFP from Ramsey, N.J.

But it's likely the sinking stock market would convince this younger worker to pull out of stocks and move into less risky investments, and he may even sour on stocks for much of his working life, according to research by Stanford University associate finance professor Stefan Nagel and the economist Ulrike Malmendier of the University of California at Berkeley.

They examined the investing habits of people who witnessed severe bear markets early in adulthood, studying data from 1964 through 2004, and found market downturns left lasting fears.

They also found that subsequent bull markets help to mitigate early aversion to stocks. Still, "extrapolating from our findings, one would expect that today's young adults will be more averse to stock investments than, say, young adults in 1999," Nagel states in an email.

Laverghetta says he often sees clients aged 40 who are afraid of stocks. "This is a complete reversal from what people this age felt five years ago," he says. To help overcome the fear born out of the recent roller-coaster financial years, Laverghetta says he shows his young adult clients long-term charts of stock performance.


Dodge the debt ditch

Like a teenager who loves getting his driver's license, young adults like carrying credit cards.

Ohio State University research polled 3,079 young adult participants several times through the late 1990s to 2004. The young adults -- polled about their credit -- were the children of mothers of the National Longitudinal Survey of Youth of 1979, which was conducted by Ohio State University for the U.S. Bureau of Labor Statistics.

The researchers examined participants' feelings about student loans and credit cards. Rachel Dwyer, lead author of the study and OSU assistant professor of sociology, says the researchers thought education-related debt could be associated with self-esteem, since it represents an investment in the young person's future.

"Surprisingly, though, we found that both kinds of debt had positive effects for young people," Dwyer says in an OSU release of the study in 2011. "It didn't matter the type of debt, it increased their self-esteem and sense of mastery."

However, the OSU research found the stress of paying the bills overtook the pleasures of owning plastic for the older participants -- those ages 28 through 34.

"Our study used data from before the financial crisis," Dwyer says in an email. Given the downbeat economy, young adults may now be less enthusiastic about credit cards, she says.

Indeed, another long-term study examining credit use among 19,000 people born nationwide as they aged from teens through adulthood conducted by NORC at the University of Chicago finds that credit card debt, acquired early, is stubbornly hard to shed.

The NORC followed people born from 1957 to1964 as well as from 1980 to 1984. For both groups, debt -- credit card as well as other personal debt acquired early in life -- was likely to still remain and have grown by 10 percent five and 10 years later, says Rupa Datta, a NORC senior fellow.



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