Millennial college graduates in2018 were in middle school the last time the markets saw prolongedvolatility. As investors, they are comfortable putting their moneyin speculative investments. But they need a better understanding ofportfolio diversification for times of instability. (Photo:Shutterstock)

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Last month investors saw an unfamiliar color when theychecked their brokerage accounts: red. Worries over rising interestrates and geopolitical concerns caused investors to flee stocks andmove into more stable options like cash and bonds.

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This is exotic to some investors, after witnessing the economicclimate over the past 10 years. In fact, the market has seenuninterrupted growth for over 3,453 days, surpassing the previousrecord set between 1990 and 2000.

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To put this in perspective, millennial graduates who finished college thispast spring were in middle school the last time the markets saw anykind of meaningful or prolonged volatility.

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There is a strange dichotomy within the millennial generation,whose years of birth span between 1981–1996 (22–37 years old).Older millennials are still scarred from the 2008 'GreatRecession,' which occurred as many were entering the workforce.

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The magnitude of market collapse during the Great Recession hascaused many of these investors to hold large cash balances in theirinvestment accounts, hindering their ability to accumulatewealth.

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Alternatively, younger millennials came of age in a market thathas grown by over 300% since March of 2009. As investors, they arecomfortable putting their money in speculative or overpricedinvestments. A strategy like this is sure to cause panic once themarket cycle turns negative, which it eventually will.

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Moving forward, young investors need a better understanding ofportfolio diversification that will afford them growth opportunitywhile also preparing them for times of instability.

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Continued conflict between the US and its trade partners,political uncertainty in the US and abroad and the end to theFederal Reserve's accommodative monetary policy create uncertaintywhich, in turn, results in market volatility. This is nothing to beafraid of, but it is something we must be prepared for asresponsible and educated investors.

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Fortunately, investors in the millennial generation have plentyof time to accumulate wealth and weather the turbulence of marketcycles.

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Now is the best time to start planning, but where do you start?Here are a few questions you need to answer before making anydecisions:

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1. What are your goals?

The start to a sound financial plan begins with an understandingof your goals. Millennials don't need to stress about the detailsof their retirement; however, they do need to ensure they areputting an adequate amount of money away to prepare themselves forthat day.

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It is appropriate to put a bulk of this money in equities, asyounger investors have plenty of time to recoup losses that occurin market downturns. Over time, the allocation to more volatileassets should be trimmed as one approaches retirement.

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Millennials do need to focus on expenditures that will occur inthe near future. This would include an emergency fund, which is thefoundation of a strong financial plan. An emergency fund shouldallow you to cover at least 6 months of expenses should anunfortunate event occur among you or your family (loss of job,illness, accident, etc.).

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For those whose income and/or expenses are less predictable, a12-month cushion may be more appropriate. Along with an emergencyfund, you should focus on certain life decisions like buying ahouse, buying a car or planning a wedding.

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Events like these have a shorter time horizon which will impactyour strategy for savings and investing to meet these goals. It isimportant that investors don't leave money in their checkingaccounts for these mid-term expenses. As inflation rises, thoseleft in cash will be losing money as the purchasing power of theirsavings decreases.

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2. How much can you part ways with?

Once your goals are defined, you need to look at your monthlyincome and expenses to understand how much can be saved each month.For some, this may be saving 20% of their paycheck, while othersmay have more cyclical income or expenses.

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Whatever it may be, a plan must be set in motion so you areallocating enough capital to the appropriate areas in order to meetyour objectives.  It is important to get into the habit ofsaving early, balancing your needs today with your needs of thefuture.

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3. How much loss can you tolerate?

When creating your investment allocation, you need to consider astrategy that will allow you to meet your goals without leavingyour risk comfort zone.

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For example, a portfolio designed for long-term growth with over10 years on to mature may have an 80% allocation to equities. Whilethis can offer a better opportunity for long term growth, it willalso experience considerable fluctuation as the market movesthrough its cycle.

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To put it in perspective, a portfolio of this nature would havelost nearly half its value during the most recent bear market from2007-2009.

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Investors must be sure that they can stomach losses of thismagnitude and avoid panicking when the market turns. It's normalfor the market to go through cycles, and young investors who havenot experienced a bear market will need to understand that.

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You don't have to make drastic changes to your investmentstrategy—assuming it's appropriate for achieving your goals—justbecause we're in the late stages of a bull market.

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But you should ensure that you have realistic expectations andthat you and your strategy can withstand during periods of negativeperformance.

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Mitchell Lamoriello is a researchanalyst with LAMCO Advisory Group.

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READ MORE:

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Millennials making costly investmentmistakes

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3 conflicts millennials have aboutfinances

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Yes, millennials do face more financialobstacles than previous generations

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