Getting Started Investing: Millennial Edition

By Brian Dolan, Head of Financial Education

Waiting is Not a Plan

Surveys of millennials routinely find them disengaged from investing, even though many of them also admit that they need to invest to build their financial futures. The reasons cited span the range from ‘not enough money,’ to ‘lack of investing knowledge’, to ‘distrust of stock markets.’

According to Bankrate.com, only 26% of people under 30 are investing in stocks, compared to nearly 60% of Boomers. Another survey of Millennials by Goldman Sachs found only 18% trusted the stock market as the ‘best way to save for the future.’ Echoing that, another survey found that 93% cited a distrust of markets and a lack of investing knowledge as reasons they’re not confident about investing. And the list goes on.

History tells us, however, that regular investing is the most reliable way to accumulate wealth and secure a better financial future. And because of the power of compounding, the sooner Millennials start investing, the better off they’re likely to be in their later years.

Take Action

The key is to put together a dedicated saving and investment strategy and then put it into action. Waiting forever is not a plan. Here are some tips for Millennials (and anyone else) to overcome their fears, build financial confidence and get started investing.

Find the money—Before you can start to invest, you need to start saving funds to invest. You might think you don’t have enough to start investing, but if you have an income, developing a budget can help you find the resources and put them to work. Even if it’s only $50 a month, it will add up over time. It will also encourage positive financial habits that will serve you well when you have more money in the future.

Make It Automatic—It’s frequently called ‘pay yourself first.’ Take advantage of any savings/investing plan offered by your employer, such as a 401k, especially if they offer any kind of matching funds. Automating a savings deduction keeps it disciplined and simple, and may be tax advantaged. If you never see the money you won’t miss it, but it will be there and growing.

Pay Off Debt or Invest?—Many Millennials have more than a fair share of student loans and other types of debt. Even if you’re focused on paying off debt first, it may still make sense to invest any surplus funds rather than pay down debt faster. It comes down to the interest rate on the debt and the potential returns that can be earned by investing. Try the DriveWealth ‘Debt vs. Invest Calculator’ to see how your situation reads.  Remember: eventually, you will pay off your debt. Wouldn’t it be nice to have an investment fund alongside a zero debt balance?

Set Your Financial Goals—Get focused by establishing the key financial goals you’re aiming for. Saving for a down payment on a house or condo; used car; retirement; travel are some of the more common goals. Identify the time frame to reach your goal (short-term/long-term) and make them specific and realistic. People who set goals are more likely to achieve them than people who just wing it.

Start Investing, Keep Investing—Even if you start out small, just get started. Maximize the effects of compounding. As your income grows over time, you’ll be able to save and invest more. Get in the habit of saving and investing regularly and you can develop lifelong positive financial habits.

Keep It Simple—Many young adults believe they don’t know enough to invest or just don’t feel confident enough to put their money to work. All that Wall Street jargon can be intimidating, to be sure. With thousands of individual stocks to choose from, how can a new investor decide which ones to buy? What’s a P/E ratio? What’s earnings per share and why is it important?

Rather than trying to become an expert stock picker, here are two simple investing methods anyone can use to start investing.

  • Buy what you know. That advice from legendary stock investor Peter Lynch has stood the test of time. The idea is to invest in brands and companies that you’re familiar with and whose products you enjoy and regularly consume. Love your iPhone or your Nike sneakers? Then consider investing in Apple or Nike. Ultimately you’re investing in the future of companies whose products you know and that have been consistently successful over time.
  • Invest in indexes. Indexes are baskets of multiple stocks, saving you the need to pick individual stocks. There are broad-based indexes, such as the S&P 500 or the Russell 1000 that cover the whole range of the largest US companies. There are also narrower indexes that cover various business sectors, such as technology or healthcare, combining dozens of stocks into a single security. Among the most popular way to invest in indexes is through ETFs, or exchange traded funds: securities that represent ownership in dozens or hundreds of individual stocks, and can be bought and sold as easily as a single share. There are also index ETFs that cover specific countries or economic regions, such as the EURO Stoxx index of the largest European corporations. Index investing also offers the advantages of built-in diversification, saving you yet another investing issue to tackle.

There are plenty of potential excuses not to get started investing. But none of them really hold up when you consider the long-term consequences of not investing. How will you reach your financial goals and build a secure financial future? The answer is to get started investing as early and as often as you can and to stick with it. Investing is not a short-term exercise. It’s a life-long endeavor that can help achieve financial security and afford you a better lifestyle. What are you waiting for?

 

 

Disclosures: All investing carries risk. Past performance is not indicative of future returns, which may vary. Investments in stocks and ETFs may decline in value, potentially leading to a loss of principal. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading. The risks associated with investing in international securities, including US-listed ADRs and ETFs that contain non-US securities include, among others, country/political risk relating to the government in the home country; exchange rate risk if the country’s currency is devalued; and inflationary/purchasing power risks if the currency of the home country becomes less valuable as the general level of prices for goods and services rises.

Most inverse ETFs “reset” daily, meaning that these securities are designed to achieve their stated objectives on a daily basis. Their performance over periods longer than one day can differ significantly from the inverse of the performance of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets, making it possible that you could suffer significant losses even if the long-term performance of the index showed a gain. While there may be strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio.

Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. The prospectus contains this and other important information about the investment company. You should read the prospectus carefully before investing. You may obtain a copy of the prospectus at drivewealth.com/explore/products