Life hasn’t been easy for Millennials. Born between 1981 and 1996, this generation has faced challenges such as the September 11 attacks, wars, the Great Recession, a student loan crisis, and now a pandemic. It’s no wonder that saving and investing for retirement may not have been a top priority for them.
However, now that most Millennials have completed their education and have been working for a few years, it’s important for them to start thinking about investing to achieve their long-term financial goals.
Let’s explore some investing basics and why it’s crucial for Millennials to get started.
Why it’s important for millennials to invest
If you’ve experienced the financial crises of 2008 or the market downturn in 2023, you may view investing as risky. However, not investing also carries its own risks.
“The worst thing you can do in your mid-20s to mid-30s is not save money and invest. Investing money early gives it a long time to grow,” says Mike Kerins, head of advisor products at Apex Fintech Solutions. Despite market fluctuations, the stock market rarely stays down for extended periods.
Stock investments offer higher returns over cash and bonds in the long run. Money in savings accounts remains stagnant and is susceptible to inflation, while stock market investments can compound over time. Large capitalization stocks returned approximately 10% compounded annually from 1926-2020, outperforming long-term government bonds and T-bills.
“The surest way to build wealth over long time horizons is to invest in a diversified portfolio of common stocks,” says Robert Johnson, professor of finance at Creighton University.
Investing money over time creates a snowball effect. “Millennials need to start compounding early and let that magic work over decades,” Johnson explains. Compounding allows you to earn interest on your investments, leading to a larger balance over time.
For example, by investing $6,000 per year at 25 years old and earning $100 in interest, you’ll continue to earn interest on the growing balance each year, resulting in significant returns compared to leaving the money in a savings account.
Learn the basics of managing your investments
- Risk tolerance: Understanding your risk tolerance is crucial before making investments. Consider your ability and willingness to handle potential losses in the market. Stock market fluctuations may test your ability to stay invested during downturns.
- Asset allocation: Determine how much of your portfolio should be allocated to stocks versus other assets like bonds or real estate. Your asset allocation may shift over time as you approach retirement age.
- Active vs. passive: Decide whether you want to be an active or passive investor. Passive investing, such as index investing, often outperforms active investing over the long term.
- Diversification: Diversifying your investments helps spread risk across different assets, leading to more stable returns over time.
- Time horizon: Consider your time horizon when investing for different goals, such as retirement or education savings. Long-term goals typically involve owning long-term assets like stocks.
Most common types of investment accounts
- IRA: An individual retirement account (IRA) offers tax advantages for retirement savings. Contributions grow tax-free until withdrawals begin at age 59½.
- Roth IRA: Contributions to a Roth IRA are made after taxes, with withdrawals tax-free at age 59½.
- 401(k): A popular workplace retirement plan where contributions grow tax-free until withdrawals begin.
- Brokerage: Allows investment in securities like stocks, bonds, and ETFs, with taxable gains.
These accounts are just a few options available for investing.
Best investments for millennials
- Stocks: Long-term assets like stocks are ideal for investing in goals like retirement. Stocks can be purchased individually or through ETFs and mutual funds.
- Index funds: Passively managed funds that track indexes like the S&P 500, offering low costs and broad diversification.
- ETFs: Trade like stocks and offer diversification across various assets like stocks, bonds, and commodities.
- Mutual funds: Pools of money from investors invested in securities, providing diversification and professional management.
Bottom line
Investing in a diversified portfolio of stocks is a key way for Millennials to build long-term wealth. Start taking advantage of the power of compounding now to secure your financial future.
Editorial Disclaimer: Conduct your own research into investment strategies before making decisions. Past performance is not indicative of future results.