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Stocks: Who Needs ‘Em?

In its recent annual investor sentiment survey, investment management firm Franklin Templeton has found that 37% of investors think they can reach their financial goals without putting a penny into stocks.

This echoes a recent Gallup poll that shows stock ownership levels at record lows, with just 52% of American families participating in the stock market.

Obviously, that’s not a great statistic trend you’re an investment company … so Franklin Templeton is quick to point out that this kind of thinking might be popular, but it’s also dangerous. It writes:

“Volatility has always been a part of equity investing. The S&P 500 Index has produced positive annual returns approximately 70% of the time and negative returns roughly 30% of the time. However, the results are even better over a longer timeframe, with positive returns occurring 95% of the time when measuring ten-year periods.”

It’s true that stocks, historically, almost always deliver a profit in the long-term. However, it’s important to note that many investors right now are decidedly short-term in their thinking.

This is partially because of our short-attention-span world, what with StockTwits and live quotes and a general lack of patience with everything thanks to the quickened pace of life in a high-tech world.

But it’s more because of simple demographics.

You see, younger Americans have no money. Consider that Edward Wolff, an NYU economist, found that the average wealth of those younger than 35 tallied just $48,400 in 2010 — roughly half the $95,500 it was in 2007! Then consider that America’s youth unemployment is a huge problem, too, with more than 16% of 18-to-29-year-olds jobless in April.

How are these folks supposed to invest if they barely have money to pay the rent?

The people who do have money, then, are older, risk-averse Americans on the cusp of retirement. Your exposure to stocks should be steadily reduced as you age because you need to use the cash, not make it grow — and more importantly, because you don’t have time to make up for losses should the market smash your nest egg.

My handy formula is to subtract your age from 100, and that gives you the percentage you should have allocated in equities, so the typical 70-year-old should only be about 30% invested in stocks anyway. It’s unsurprising that those who are more risk-averse want less than that, even opting for zero stock exposure, after living through the dot-com crash and housing meltdown.

So what are stocks good for? Well, if you’re younger and you have the money, then investing is a powerful way to provide for your retirement. As Einstein purportedly said, compound interest is the most powerful force in the universe. Just $5,000 a year invested with 5% annual returns gets you almost $350,000 in 30 years.

But older Americans don’t have 30 years. And younger Americans don’t have the money.

It makes you wonder who exactly is buying stocks right now.

Or, if you want to be optimistic, it makes you wonder how explosive the rally will be if younger workers ever do get a decent job and a 401k match that’ll allow them to start investing in stocks.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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