The trends that the asset markets are displaying currently should motivate young investors to engage in long-term financial planning strategies.
Corporate data indicates that the individual correlation of stocks have been rising over the last few months. In addition, robust demand for high-quality debt-based instruments that are considered “safe” has pushed yields in many bonds to ultra-low levels.
The higher correlations make it more difficult for investors to beat the market by picking out equities that outperform the broader market for stocks. The environment of low yields can interfere with market participants who want to generate acceptable returns by using bonds.
One way that these individuals can overcome the myriad challenges presented by both the stock and bond markets is to engage in long-term financial planning. This strategy can be particularly helpful to young investors who don’t necessarily need their funds back any time soon.
Equity market returns
While the equity markets have displayed high correlations and substantial volatility in the recent past, the stock market as a whole has provided average annual returns that are traditionally estimated as being 10 percent. Data recently provided by independent financial advisor Index Fund Advisors states that the stock market has averaged an annual return of 9.6 percent since 1928, according to USA Today.
It is important for young investors to remember that the figure of 10 percent does not mean that putting $1,000 into the stock market in January of 2013 will result in having $1,100 in January 2014. The annual figure of 10 percent is one that has been averaged over many years. The returns granted by the equity markets in any given year can vary substantially. It is also important to note that the average annual returns of 10 percent are not adjusted for inflation. Inflation is difficult to measure since its various components rise unevenly.
In addition to inflation, fees associated with the purchase of financial instruments can eat into the returns generated by investors. One way to keep these transaction costs down is to participate in the strategy of indexing, which involves purchasing securities that passively track the markets.
Young investors can quickly gain exposure to the equity markets by placing their funds into financial instruments such as index funds or exchange traded funds (ETFs). By engaging in long-term financial planning and constructing a diversified portfolio of ETFs and or index funds, a person can put a solid strategy in place and begin to accumulate wealth.