How Millennials Should Approach Investing
You graduated from college, and you were just beginning your career when the bottom fell out and the Great Recession took everyone for a ride they didn’t want. It’s a fact, and it’s real, only 26% of millennials own stocks despite the fact that stocks have tripled since 2009 (not to mention that over time they yield more than any investment). That’s hard to ignore. What isn’t hard to ignore is that millennials face real challenges when it comes to investing: they’re not making enough money, they don’t know much about investing, and trust in the stock market is extremely low. We acknowledge these problems and are committed to providing you with some tools to get into the stock market to start making your money work for you.
Investing Made Easy:
Okay, so you’re not making much money and there certainly isn’t enough to make a significant investment. If this sounds like you don’t worry, you’re not alone. Fortunately, companies such as Acorns have identified this problem and created a product to combat it. Acorns has you assign at least one debit card to your account, and it will round up your daily purchases to the nearest dollar. They’ll take the difference between this amount and the actual amount of the purchase to distribute into a safe investment. That’s great news! Let’s take a closer look.
Investment – Acorns was founded by a Nobel Laureate who created a way to invest in the easiest way possible. Your money will be deposited into Exchange Traded Funds (ETF’s), which are low-risk securities filled with safe investments.
Fees – Are you ready for the best part (other than making money of course)? Acorns charges as little as $1 per month! You read that right. Who doesn’t have $1 to spare to make some money?
Access – Another nice feature is that ETF’s trade like stocks, so you can deposit and withdraw funds at your convenience. But since we’re trying to teach you a little about investing we recommend you leave that money alone.
Contribute to your 401(k), like now:
I remember when I got into college the University provided me with 14 study methods to get ahead. One that I’ll never forget is to always do extra credit assignments. Contributing to your 401(k) is like an assignment, but did you know that most companies offer to match a portion your contribution? That’s right, free money (or extra credit)! Employers will generally offer between a 1-5% match, and your goal (if it’s possible) should be to get all of the matching funds. If not you’re leaving money on the table.
But what does a 401(k) do for you? Now is a good time to explain how compound interest works. Before we get into this discussion we couldn’t help but throw in a quote from another Nobel Laureate.
“Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t… pays it.” – Albert Einstein
Compound interest at a glance – Take a seat, here we go! In the 20th century, the stock market gave investors an average return of 10.4%. In actual dollars that means that a $1,000 investment in 1900 would be worth $19.8 million 99 years later. But who has 99 years, and can we really count on the market to continue with that return rate? Maybe, but let’s make another, more realistic example.
If you invest $160 a week (remember your contribution to your 401(k) and your company matching it) for seven years, and the market gives you say, a 7% return, by the end of seven years your investment will be worth $74,542.
Tip: If you want to see for yourself go to our homepage. We have financial calculators to help you understand how much you stand to make off your investments.
Taken in the long run, like 30 years, which is a little short of calling it a career, you can really see how compound interest pays off. If you continue to invest $160 a week for 30 years and receive an 8% return then your investment will be worth just under $1 million. I could retire with that. Just remember, the earlier you start the more you stand to make. Take that same example and extend it to 35 years and now were talking about almost $1.5 million. That’s 50% more on your return because you started at 23 instead of 28 years old. Not bad.
Take a Chance:
You’re young, life is fast, and you like to take risks. When it comes to investing that’s a good thing. Investors agree the time in your life to take some chances on risky, high-yield investment opportunities is when you’re young. For once the correct decision is in line with the tendency of the millennial.
The simple fact is that you want to make as much as possible, as early as possible. If some of your investments hit it big your profits will soar! Remember compound interest? The more you have in your retirement account at the beginning the more it will be worth in the end. What’s more is if you take a hit and the investment doesn’t pan out don’t worry, you’re young, and you have plenty of time to make up for it.
Tip: Need some advice on where to invest your money? You already know where! You know who has the best streaming, where to get the best information, and the hot new tech company. So why not put your money there? If you like their product it’s likely that a lot of people do, and the same is true if you don’t. The key is to tune out what you hear on social media or overhear in the coffee shop. You’re in it for the long haul, so relax and stick with it.
Start Simple: Now is a good time to have a discussion about mutual funds. Mutual funds are great because they give the little guy a chance to invest in a fund that is managed by a professional. Doesn’t sound good? That’s okay, we know the facts. According to Goldman Sachs only 18% of millennials have faith that “the stock market is the best way to save for the future.” And we’ll take it a step further and acknowledge that the biggest problem with mutual funds is that it costs you money to have the fund managed. So what’s the upside?
Low risk – There just isn’t a better way to diversify your investments than putting your money into a mutual fund. Your money is spread out and let us reiterate that it’s managed by a professional. The big decision comes when deciding which mutual fund is best. There’s no simple formula for deciding, but the two most important factors are deciding what your objective is and how much risk you are willing to take.
When considering your objective think about what you want to use this money for – will you use it to pay for college, are in it for the long run, or are you saving for retirement? When identifying risk think about if you’re the type of person that can handle big swings, or can you afford to lose the money? Do some soul searching, you’ll have to decide for yourself what the answer is.
Low cost – Didn’t we just say that fees cut into your profits? The short answer is yes, but here’s the catch: mutual funds contain many different investments that require attention. It does take some expertise to know when to sell off certain investments and when to reinforce others. That’s the job of the investment manager who you’re paying fees to. The upside is that you don’t pay the cost of these trades. Buying and selling stock on your own will usually bring about fees on both ends. These fees are absent from mutual funds.
It might take some time to build enough savings to make an investment in a mutual fund. The minimum investment for most mutual funds is around $2500. That’s a small amount considering how much your money is spread out. If you can save that much there’s potential for a huge upside. So maybe buy a less expensive car and use that money to make money. You can buy a more expensive car later when you collect the profits.
Read the Fine Print:
We touched on fees a little bit during our discussion of mutual funds, but now is a good time to discuss them further. Fees are generally unavoidable, even in your 401(k). No one likes to pay fees, but since they’re a fact of life it’s important to know how much is normal. We’re going to take a look at fees in a standard 401(k). We want to focus on this because if your employer offers matching funds for your investment then a 401(k) is your best vehicle for investing. So what should it cost?
Fees in a 401(k) largely depend on how many investors are in the fund. The more investors in a 401(k) the better – there are more people paying the fees, therefore, the individual investor pays less in fees. But there are many different fees to pay attention to. Here’s a breakdown using an average size 401(k) plan (500 investors and $25 million in the fund).
Revenue sharing fees – These fees are bundled into the cost of the investment to pay service providers (not the investment manager). Given our sample 401(k) plan you should expect to pay roughly $255 per year.
Net investment cost – This fee is paid to the investment manager. It does not vary much from plan to plan, meaning whether the fund is big or small, or has many participants or few, you’ll end up paying somewhere in the neighborhood of $265 per year.
Record Keeping – Just what it sounds like. Trading and managing funds create a lot of paperwork, and just like everything else it costs money. This one is a small fee though and should only be about $18 per year.
Conclusion: As simple as we made it, we realize there’s still a lot to know. Of all that we covered in this article just remember that the objective here is to make your money work for you. You worked hard to earn it and it is a wonderful thing to watch it grow. Start with your 401(k) and get that match your employer offers. Don’t leave money on the table, you’ll thank yourself for it later.