By Rebecca Lake, ContributorSept. 28, 2018, at 9:43 a.m.

Millennial investors should avoid overcomplicating asset allocation when adding stocks or other non-cash investments to their portfolios.(GETTY IMAGES)

CASH IS KING, AT LEAST among millennial investors. A July 2018 Bankrate survey found that 30 percent of millennials favor cash for long-term investing, ahead of stocks, real estate, cryptocurrencies, precious metals and bonds.

Millennials’ reluctance to venture into riskier investments traces its roots to the 2008 financial crisis. Many entered the workforce during the Great Recession, when companies weren’t hiring, while simultaneously watching their parents and grandparents lose significant amounts of wealth in the market.

“This has inevitably made many of them risk-averse, to the point of being too conservative when they look at how they allocate their own assets,” says Julia Pham, wealth advisor at Halbert Hargrove in Long Beach, California. But, “as bad as the Great Recession was, the people who recovered in their investments were those who stuck to it and rode it out, which should give some reassurance when venturing beyond cash and into stocks.”

Some millennials are still waiting for what feels like the right time to enter the market. That’s a mistake, Pham says, “because most of the time you won’t get it right and trying to figure out when to enter oftentimes keeps you on the sidelines in cash for too long.”

Millennials may also steer toward cash because it’s more familiar than stocks or other investments.

“When people become overwhelmed or face something unknown, they tend to defer making decisions and lean to concepts they understand – in this case, holding cash,” says Arian Vojdani, investment strategist at MV Financial in Bethesda, Maryland.

Too much cash can impede portfolio growth. While cash can offer a sense of safety, it doesn’t yield the same return potential as stocks.

“Having too much cash is unwise because your money isn’t working for you,” says Mark Farnan, president of Retirement Income Planning in Madison, Wisconsin. Tying up too much money in savings or money market accounts that pay interest rates below or at the current rate of inflation “means you’re going backwards or at best, only breaking even on the purchasing power of your cash dollars.”

Matthew Peck, co-founder of SHP Financial in Plymouth, Massachusetts, says three to six months’ worth of living expenses in cash is enough for millennials. Beyond that, younger investors should focus on creating an asset allocation based on when they expect to need the funds.

“If it’s in two to five years, you can be in short-term bond funds and balanced funds, while longer term needs, such as retirement accounts, should be stock-heavy,” Peck says. “Right now, millennials have time on their side but by not investing their funds properly they’re squandering that asset.”

Living longer is a game-changer. An old rule of thumb for asset allocation is subtracting your age from 100 to arrive at a target percentage stock allocation. Timothy Chubb, chief investment officer of Univest Wealth Management Division in King of Prussia, Pennsylvania, says that rule doesn’t necessarily work for millennials.

“Americans are living much longer, which means investors typically need to stay more aggressive for longer, as the accumulation phase of life is longer than historical norms,” Chubb says. “Now, using 110 or 120 is a more realistic reality, given the ever-increasing life expectancy.”

For a 35-year-old millennial, that translates to holding 75 to 85 percent of their portfolios in stocks. But, that can be intimidating for younger investors who fear the unknown or choosing a losing stock.

When that’s the case, it’s important for millennials to drill down to their reasons for holding onto cash, says Peter Faust, certified financial planner and wealth advisor at Tanglewood Total Wealth Management in Houston. Specifically, they should ask themselves what their fears and goals are, and whether they’re rational and realistic.

Simplicity trumps other strategies. One of the worst mistakes millennial investors can make when adding stocks or other non-cash investments to their portfolios is overcomplicating asset allocation.

“Allocation should be centered around large cap U.S. companies,” Vojdani says, such as those included on the S&P 500 and Russell 1000 indexes. “As you save more and your portfolio grows, look to large international companies and mid-cap and small-cap U.S. companies to diversify.”

Exchange-traded funds can appeal to millennials who want to streamline asset allocation even further. “ETFs that give you exposure to different benchmarks are a great way to gain exposure to the markets for a low cost,” Vojdani says.

Farnan says considering the right questions can help millennials choose which direction to follow. That includes asking yourself: What is my timeframe? What is my risk temperament? What is my objective?

“A person can determine what they should do with every dollar they have by answering those three simple questions,” he says.

At the end of the day, “your overall goal is to participate in market growth to increase your principal and ensure that your savings grows to allow you to live a lifestyle that you’re both happy and comfortable with,” Vojdani says.

Focus on allocating for the long-term and tune out distractions. Market volatility is unavoidable, but millennials must remember that they’re playing a long game.

“Be aware of what’s going on in the market, but at the same time, if it’s not broke, don’t fix it,” Faust says. “Picking an asset allocation is a long-term commitment, so you want to make sure that you give it enough time – not one or two years, but through full market ups and downs to ensure that it’s aligning with your expectations.”

That doesn’t mean leaving your portfolio completely alone, however. You should be checking in regularly and rebalancing your asset allocation as needed. Chubb says quarterly check-ins are sufficient to see how your investments are performing and whether you’re still on track with your goals.

“More frequently than that and inexperienced investors will run the risk of being tempted with overtrading or complicating things,” Chubb says. “Less frequently and it doesn’t become a routine and is often an afterthought.”

Rebalancing keeps you from becoming over- or under-exposed in any one asset class, says Patrick Kinney, vice president at EP Wealth Advisors in West Los Angeles, California. A millennial who prefers a 75 to 25 percent split between stocks and bonds, for example, might need to rebalance to take profits from stocks and reinvest in bonds if they become overweighted.

The most important thing for millennials to keep in mind with asset allocation is that it’s highly personal. When crafting your portfolio, it’s not the time to follow the crowd.

“Develop a plan that’s suited for you,” Kinney says. “When the market cycles get tough, and they will again, you’ll have peace of mind as to why you have invested the way you initially did.”

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