When it come to investing there are some important investment tips and rules that millennials should follow because they are young, have large purchases coming their way (education, home, wedding, and so on) and because it’s presumed they have their entire careers ahead of them. At a high level, all investors should think about long term returns and diversification – because a diverse set of investments protects against risk. But youth investors have a few additional things going for them and therefore youth investing is inherently different than adult investments and this article provides tips on how millennials can think about money in the context of investments.
Where to start?
Firstly, time is a huge asset for millennials. They have their entire careers and lives ahead of them. So what does this mean from an investment point of view? Naturally, youth investors can afford to take on more risk because any gains or losses they are subject to will likely correct over broad periods of time. If the value of an investment drops by 40% one year but climbs back the next, it will likely not impact the millennial very much. On the other hand, if an adult investor close to retirement were to lose 40% of their assets, it could postpone retirement or cause tremendous pain. Luckily, most millennials are immune to this and will work and participate in the labor force regardless of asset performance.
Time is money!
Time is also a big asset because strong performance can compound and grow rapidly over time. Imagine an older investor with a great investment: they might have only 1 year to see that grow before retirement. A millennial could see this investment flourish over a period of 30 or more years. Think of some of the best blue chip stocks in the world – what are there returns on a yearly basis? How much did they grow over a period of 30 years? One example is a company like Microsoft. In the past year it’s stock has appreciated ~15%. In the past 30 years however, it’s stock is up a whopping 62,000%. Because money can compound the potential for tremendous gains over big periods of time that simply don’t exist in the short term. Millennial investors can take advantage of this by starting early.
The Importance of Diversification
The next investment tip for millennials is to diversify. Part of this is intellectual and part of it is financial. Let’s looks at the intellectual realm first. Simply put, if an investment is one asset, and that asset declines, then a millennial may lose a large percentage of their capital. If they diversify, however, then any single one decline has a relatively small impact on the broader portfolio. Of course the converse is true. If one asset grows tremendously in value, the total investment will increase but not by a massive amount.
Invest for the Future
The third principle for millennial investors is to learn about the methodology of investing. World-leading investor Warren Buffet famously stated that “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” Youth investors should invest in assets that they find interesting in addition to potentially lucrative. While an adult might invest in a company solely because of it’s financial upside, a millennial can think about what industries they find interesting and start doing research about it. Perhaps your millennial likes cars – understanding and learning about auto companies mike make a lot of sense. It follows that an investment in an auto company would not only help their portfolio but could help your millennial investor understand how a car company brings in revenue, maximises profit, hires, and expands the sale of its products. This learning is a side benefit of the investment strategy: not only does the millennial get knowledge they get an investment. Both are worthwhile and can pay dividends in the future.
The Power of Common Sense
Now that we have discussed some broad strategies (diversify and start early and invest in companies where there is a general intellectual appeal) let me take a moment to suggest some must knows. Firstly, a millennial investor (and likely all people) should never buy a stock or bond based on what one person says. My advice is to ignore advice that points a millennial at a single company or sector. But in particular, millennials should fear people that claim to know all the answers. You would not buy a car or a house with one person claiming it was the best house or car ever and millennials should avoid these pitfalls with stocks too. Do research, think critically, and look around. The internet in particular is a great source of both wonderful knowledge and general junk. Give your intuitions a test drive – if a millennial thinks something is a good investment, ask why? What makes it interesting or compelling? You and only you can guide a millennial in this respect. Is the investment good? Remember that the value of an investment can go up or down. This is not what makes an investment good. What makes it good is that you understand the value of your purchase and believe that the investment will appreciate and increase in value over the long run. One poor decision is not the end of the world – especially for younger investors. Learn the fundamentals about how to value a company, including how to read it’s balance sheet and the strength of it’s industry. Ask: is this industry expanding or contracting? How are macro-level trends (consumption, prices, technology) impacting this space? These questions matter in particular for millennials because changes in consumer behaviours, technology, and macro-trends may play out in decades, not years.
The second piece of advice is to re-invest, re-invest, and reinvest again. When a millennial makes money, it’s important they re-invest so they can keep their momentum and engagement going. Why? Compound interest and compound growth can help money grow far beyond it’s initial value. When money is extracted from an investment, it greatly loses momentum. For a millennial investor, momentum multiplied times time can leads to truly extraordinary gains. Take the example of a $5,000 investment made into an account that pays a 5% annual interest rate, compounded monthly. After only 10 years, the value of the asset or investment will have increased to $8,235. This is a “free” $3,235, which can easily pay for books or part of college or even a several month’s rent. In other words, it’s significant.
Millennials, as discussed, have special investment needs and opportunities. They have special risks as well: they are often first time investors so likely less well informed. But this needs not be the case. An informed millennial has a lot going for them: time and future earnings. If they diversify their assets, start early, re-invest, do research, invest in sectors they find interesting, then they will be off to a good start. By leveraging sustained growth over a period of time, a millennial can witness the power of compound interest. When speaking with kids about these topics, it’s important to put investing in a broader context of lifestyle choices. Investing money is not hard but it takes patience, commitment, and focus. It also takes energy and research. Like driving a car, there are steps that must be done before the foot steps on the gas. If a proper methodology is followed, millennial investors can see huge rewards, not only as young adults but also as they mature.
By starting now (as in today) millennials can best reach their savings goals, even if those are not clearly defined. This is crucial because often the purchases that need to be made are not always foreseen. So having some extra cash in hand can go a long way to enabling one to buy what they need or desire. While working for money is one way to live life, another is to make your money work for you. This can only happen if money is invested early, and in diversified assets, and re-invested continuously. And while results from investments naturally go up and down, the key principles of investing should remain the same. This is advice worth passing on – because exposure for a millennial today can greatly improve and alter their life in the future. Even if you don’t believe in investing, it’s worth speaking with your kids about it. It might not make their life better today, but it will in the future. And that is something worth investing in.
It’s your turn. Tell us below if these tips worked for you? Do you have any other advice you’d like to share? Drop a comment below.