Young investors planning for retirement should buy and hold

By YOUNG MONEY Staff
7 March 2012

Investors who are just starting out with their retirement planning efforts should seriously consider utilizing buy and hold strategies. This will help prevent them from not saving enough to retire comfortably.

Data that was recently compiled by the Employee Benefit Research Institute (EBRI) indicates that only 0.2 percent of individuals who are saving for their retirements have accumulated more than $1 million in their 401(k)s, according to SmartMoney.

EBRI research director Jack VanDerhei told the news source that only 2 percent of people who are 55 or older and have been putting money into the same 401(k) plan for 20 years have accumulated more than $1 million in their retirement plan.

The equity markets have displayed substantial volatility over the last few years, but investing in the stock market still provides better average annual returns in the long run than putting the same funds into "safe" assets such as cash, bonds and cash equivalents.

Substantial evidence suggests that active management generally provides lower returns than employing buy and hold strategies. Investors have historically done a poor job of timing the market. People always reiterate the traditional wisdom of "buy low, sell high," but the reverse frequently happens.

Investors frequently succumb to periods of "irrational exuberance," believing that asset values that have been following a steadily-rising trend will continue to appreciate. People often buy stocks because they are "hot," which often means "overvalued" in the long run.

Once a bear market hits, fear triggers a selloff in many assets and stocks decline in value. Many investors respond to these falling values by unloading their stocks, and in doing so "selling low" instead of their desired outcome of selling high.

Young investors who are planning for their retirements need to realize that they will not need to stop working and begin living off their savings for many years. As a result, they will have a long investment horizon. This longer period of time can provide them with greater certainty, as equity markets fluctuate substantially in the short term but offer strong average returns over longer periods.

Different studies have provided different ages when people think they will retire, but most individuals plan on working at least into their 60s. A person who is 22 years old and plans on working until the age of 62 has 40 years to save for retirement, and this window of time will allow him to experience various booms and busts in asset markets.?

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Source: http://www.youngmoney.com/investing/young-investors-planning-for-retirement-should-buy-and-hold/

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