How Millennials Can Become More Savvy Investors
Millennials are serious savers, but they’re reluctant to invest in stocks for long-term savings. Here are 5 ways parents could convince them to change their minds.
Baby boomers are more optimistic than millennials when it comes to the stock market, according to Capital Group’s 2017 Wisdom of Experience survey. As with many aspects of life, parents’ influence could help their children get past fears. If you think the next generation could use some encouragement, share these facts to get them started on a successful investing career.
Consider this: While the stock market was up 7.44% for the 10-year period ending September 30, 2017 — a period that included the market downturn — money market and cash investments inched up just 0.4%. Meanwhile, the average annual inflation rate over that same period was 1.68%.*
The good news is that saving for retirement ranks high on the financial priorities list for millennials we surveyed — ranking second only to paying the rent or mortgage. However, only 13% of millennials said stocks were their first choice for long-term savings, according to a recent Bankrate survey. Instead, young adults prefer conservative investments, with 30% favoring cash.
Conservative investments might seem more safe, but that comes at the expense of potential growth. “Millennials face the risk of opportunity lost,” says Divam Mehta, a certified financial planner with Mehta Financial Group. “Investing in the market has shown that it is one of the most viable methods to outpace inflation.”
Here are 5 ways to get millennials interested in investing:
1. Get Started Easily With a 401(k)
For many investors, the first exposure to investing could be their employer’s 401(k) plan.
- Employees can arrange to have just a few dollars automatically invested from their paychecks, and over time they can increase their contributions.
- Employers often match a portion of employee contributions. It's a good idea to consider contributing enough to take full advantage of the employer matching contribution provided by the plan.
- Many 401(k) plans offer target date funds among their investment options. These “set it and forget it” funds lean heavily toward equities during workers’ early years and grow more conservative as they approach retirement. So millennials don’t need to make a lot of decisions about how their money will be invested.
- Freelancers, or employees with no access to a 401(k), can open an individual retirement account and arrange for automatic transfers from a bank account. Both 401(k)s and IRAs offer tax advantages that can help investments grow.
2. Match Financial Goals With Appropriate Investments
A savings account is important for short-term financial goals, but investing could be a better option for reaching long-term financial objectives.
- Cash has its place. Money needed for achieving near-term goals, such as establishing an emergency fund or saving for a home, should be invested in liquid, conservative investments, such as cash or money market accounts. “If you’re trying to buy a home in the next two to four years, you should think twice before risking that money,” says Douglas Boneparth, president of financial advisory firm Bone Fide Wealth, and co-author of the book The Millennial Money Fix. “Keeping cash won’t earn you anything, but that money will be relatively safe for when you need it.”
- Equities can help achieve long-term savings goals. Money not needed for a few years should be invested in an asset allocation with an appropriate mix of stocks. Generally speaking, the more time you have to meet a particular goal, the more investment risk you should be able to take. “Handle the fundamentals first,” Boneparth says. “If you have handled these items, you should start letting your money work for you through investing, as it is a key way to build wealth over time.”
3. Understand That Time Is on Millennials’ Side
The power of compounding can be a powerful motivator.
When you’re young, your money has time to grow and to compound. When an investment’s returns generate earnings, those are reinvested and generate earnings of their own.
An investment calculator can help illustrate the power of compounding. Let’s say at age 25 you start with an investment of $1,000 and then continue to invest $100 a month. Over 40 years, you will have invested $49,000. Assuming an annual return of 6%, your investment would be worth more than $200,000.
For young investors, “time is their greatest ally,” Mehta says. “With this type of enviable head start, millennials will have more than three or four decades until retirement. That’s up to 40 years of market returns they are able to capture.”
4. Diversify With Mutual Funds
Risk-averse millennials should consider mutual funds, which pool a variety of investments in one package, reducing the impact of the results of any one stock or bond on your entire portfolio.
“Mutual funds are diversified from your very first dollar, and that diversification helps reduce risk,” says Greg McBride, chief financial analyst for Bankrate.com.
Millennials might be interested to know that their peers are already investing in mutual funds earlier than previous generations. Households headed by millennials bought their first mutual fund at the median age of 23, according to a survey by the Investment Company Institute.
5. Start Small
Nearly four out of 10 millennials believe they need at least $1,000 to start investing, according to a Harris Poll survey. In reality, they can start with much less. For instance, the minimum initial investment required for most American Funds is $250.
Even small contributions to an investment account can build over time. The important thing is to start early and make investing a habit.
“The idea is to just get started,” Mehta says. “Allocate a fixed amount that will automatically be invested into an investment account from a checking account. Make it part of the monthly budget.”
* Sources: Stock market – Standard & Poor’s 500 Composite Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2017 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. Money market and cash investments – U.S. Treasury T-Bill Auction Average (3 months) Average annual inflation rate – Consumer Price Index, U.S. Department of Labor, Bureau of Labor Statistics.