Saving v Investing
There is a lot of talk in the press at the moment about how millennials (generally defined as those born between 1982 and 2004) will be working well into their 70s or even 80s because stock markets aren't going to produce the same returns as they have historically. The baby boomer generation had it pretty easy in saving for retirement when you look at what asset returns have been since 1980 (figures from Ben Carlson):
- Stocks +6,111%
- Bonds +1,542%
- Cash +423%
- Real Estate +336%
However, as Ben Carlson points out on his blog, it doesn't really matter what returns are going forward if young people don't save any money. If you save very little then you can invest very little. When you focus on returns, you are focusing on the wrong thing. Your savings rate is far more critical than the returns you earn. Which is great news because saving more is something that you control, whereas increasing your rate of return is far more difficult.
Here is a chart of the savings rate since 1960. The current savings rate of less than 5% is pitiful.
The amazing thing about being young is that you have time on your side and you don't have to do that much to benefit from the power of compounding. Over the past few weeks I have had a number of twenty-somethings in my office who have a very high savings rate and are ready to start investing. Assuming that together we are able to keep their savings rate high (that means avoiding lifestyle creep, keeping up with the Joneses, and all the other traps that are very easy to fall into) they put themselves in the top echelon of investors. All of these young professionals will be in a position to stop working in their early 50s. They may not want to stop working, but they give themselves the choice.
Remember, you can't control what the markets do over the next three or four decades, but you can control your spending and therefore your saving. Everything starts with saving.