It wasn’t long ago that I saw a steady stream of young military service members exhibiting a bad combination of financial illiteracy and expensive taste. If you’ve been around the military for a while, you know what I mean: the 19-year-old hotshot driving the newly leased BMW or the 20-year-old with a flair for dropping their paycheck on nightlife.
True, those descriptors could apply to a lot of young people, not just service members; but the ramifications of financial irresponsibility are magnified when maintaining a security clearance is a condition of continued employment.
Over the last few years, however, something strange has happened. Those young service members spending with reckless abandon are still out there, but an increasing number of their cohort have become captivated by something else entirely: investing. I’m not the only one who has noticed the phenomenon; The Wall Street Journal published an interesting piece on it late last year.
This is a promising shift that the military would do well to capitalize on. One suggestion that could prove valuable from a retention standpoint is a financial literacy course for newly enlisted troops. Many of these young patriots are earning their first real paycheck – and experiencing the temptations that come along with it – only to soon find themselves in debt and at risk of losing their newly issued security clearance. (Delinquent debt is consistently the top reason for security clearance denials and revocations year after year).
But as The Wall Street Journal points out, even a promising shift toward an investor mindset can come with excesses and risks. In a follow-on to its original piece, the Journal highlighted some alarming facts: many young service members have portfolios heavily concentrated in just a few stocks with little buffer set aside for inevitable market swings. And in 2020, 8 of the top 25 U.S. zip codes reporting investments in cryptocurrencies to the IRS were around military bases. That translates to a lot of servicemembers with poor investment diversification and heavy exposure to some of the riskiest investments on the market. As some of them have undoubtedly learned the hard way, the market doesn’t always go up.
Generally, investment professionals instead recommend a broadly diversified portfolio, with proven, low-cost index funds forming the majority (if not the entirety) of the investor’s position in the market. Common examples include Total Stock Market or S&P 500 funds, coupled with a small position in a Total Bond Market fund that increases as the investor moves closer to retirement. That may not be a particularly exciting or discussion-worthy investment mix, but historically it has outperformed most alternatives with lower expense and risk. Personally, I’d rather be boring and rich than exciting and broke.
Of course, each investor’s specific risk tolerance, objectives, and horizon differs, and this column does not constitute investment advice. That said, I can’t recall ever having a client who paid their bills, lived within their means, and invested in low-cost, broadly diversified index funds lose their security clearance due to financial irresponsibility. I can recall seeing plenty of people who chose an alternative path wind-up losing everything.
Lastly, a word of caution before diving into any investment, even the “boring” kind: all investors should ensure that they are risking only the funds they can withstand losing and that they have an emergency savings fund constituting at least six months in expenses not invested in the markets. Life happens, and the worst thing for an investor is being forced to sell an investment while the market is down in order to free up cash for an unanticipated expense.
This article is intended as general information only and should not be construed as legal advice. Although the information is believed to be accurate as of the publication date, no guarantee or warranty is offered or implied. Laws and government policies are subject to change, and the information provided herein may not provide a complete or current analysis of the topic or other pertinent considerations. Consult an attorney regarding your specific situation.
