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Stock trap for millennials investments

To many people, the economy looks great, especially when compared to how bad things have been. Unfortunately, those who pay attention to the stock market are seeing signs that we may actually be in for another thrashing, perhaps as bad as the recession or even worse.

Unassuming Victims

Obviously, this type of news is disturbing. However, it's not coming from some anonymous online forums. Billionaire Carl Icahn and respected economist Andrew Smithers are just two of the esteemed thought leaders who have warned the public of what's to come.
Smithers even went as far as to say that stocks are now 80% overvalued. For those who don't recognize the name, Smithers has a reputation for being prophetic, having correctly predicted what happened in 1999 and 2007.

What makes this so much worse is that many millennials don't see it coming, primarily because they don't even know they are investors. Many millennials' investments have retirement funds like 401(k)'s. These have traditionally been viewed as safe, risk-averse tools for investing.

The problem is that while this generation has proven they want to avoid the mistakes of their predecessors, millennials investments show they're walking right into it.

The Problem with 401(k)'s

Generally speaking, 401(k)'s have earned their reputation for being safe havens. They've been especially beneficial for younger investors, too, who have decades to wait out the fluctuations of the market.

The problem is that for millennials, these investments have turned into rainy day funds. There's no longer the expectation that there will be decades of employment to feed into these investments.

This makes them far riskier than for generations before them. Unfortunately, it gets worse. What happens when millennials see investments like 401(k)'s as anchors around their necks?

The Coming Problem

Most of you can probably already see the problem.

You have countless millennials all over the world. They're already risk-averse, meaning they genuinely just want to know they'll be taken care of, as opposed to trying to strike it rich in the stock market. Unfortunately, the majority of investment managers don't understand this. Instead, they think that because their clients are young, they'll have no problem taking on some extra risk. As a result, they craft a portfolio that's 80% to 90% in equities, which is much higher than the average millennial's risk tolerance.

Now, if the experts we cited at the beginning are right, then we're already well into a year that's going to involve another major economic collapse. As that begins to happen, it's not a stretch to imagine that many millennials will decide to drop whatever investments they do have as fast as possible.

By doing so, the collapse will really begin to take off.

The Solution

While it's tough to know what's coming, most millennials should look to diversify immediately. Studies show that most only want 43% to 63% of their portfolio in stocks. Furthermore, in the U.S., the average risk tolerance score for people born from 1980 to 2000 was 52.3 out of 100, according to FinaMetrica. That means millennials should have relocate 50% of their assets in average into laddered bonds anyways.

If millennials investments are to avoid the coming stock trap many are predicting, they're going to need to start moving their money quickly. The market has already begun to drop, many who thought they didn't have any investments in the first place will begin finding out otherwise in a very cruel fashion.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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