6 Things to Avoid When You’re a Gen Y Investor

by Sophia Bera on November 4, 2015

Investing can get a bad rap thanks to the scary economic news we’ve heard in the past few years. Not to mention the two market downturns we’ve been through in the last two decades. Combine that with the downturn of the housing market that caused many millennials to witness their families lose homes or filing for bankruptcy, and it’s no wonder that Gen Y isn’t crazy about investing.

In reality, investing should be boring. You sign up for your 401(k) and choose an asset allocation. Or you open and fund a brokerage account, indicate what you’d like to buy, and set up an automatic contribution each month. As a bonus, you earned yourself some serious Responsible Adult points.

And it’s not necessarily safer to stuff your cash savings under your mattress. While it’s important to keep some of your assets in an easy-to-access savings account, the interest you’ll earn on that is small compared to your potential earnings over time if you invest some of that money instead. You want the value of your assets to exceed inflation and continue increasing in value — that mattress money, on the other hand, will be worth less when you fish it out 30 years from now than it was when you put it there.

Investing wisely can grow your potential nest egg beyond the rate it will grow if you rely on savings accounts only. But first, you need to be in the right place, financially speaking, before you’re ready to start.

Beginning Before You’re Ready

Before you open a brokerage account, there are other financial things to get in order first. Your high-interest credit card debt needs to be paid off, and from then on you should be able to cover your monthly bill without accumulating debt again. If you have student loans, make on-time payments (and even better if you can pay more than the monthly minimum!).

In short, pay off any high interest debt and be able to make payments on low-interest debt until it’s all gone. Then, work toward building up savings. Set aside a few months’ worth of your income in an emergency fund. Contribute enough to your employer-sponsored 401(k) to get a company match and fully fund a Roth IRA each year.

After you pay off debt, save for retirement, save for emergencies, and pay your typical monthly expenses, look at the money that’s left. Is there anything you’re saving up for that you’d like to buy in the next five years, like a house? That cash should stay cash, ideally stashed in the highest-interest savings account you can find. (This is another reason why I hate most of the studies on millennials being “risk adverse” because of how much cash they have. Often times there are very good reasons to have a lot of cash on hand like emergency savings or saving for a down payment or travel).

Once you’ve taken care of all those other things, you can start creating a plan for investments.

When you start investing, you should look at the money you want to contribute as funds you are okay with not using at least five years. It’s important to invest for the long-term because your investment dollars need time to grow. Some people treat the stock market as a get rich quick scheme, but you’re more likely to be successful if you hold onto your shares for years. Your portfolio will experience years with positive returns and years with negative ones, so stretching out your investing time horizon will let the good years outweigh the bad. (And bear in mind that your retirement accounts are investment accounts, too. See? You’re already an investor!)

Waiting Too Long to Begin

Since reaching adulthood, Millennials have been bombarded by dire news reports about the economy. Here’s why this shouldn’t scare you: if you’re in your 20s or 30s, you have time on your side.

And thanks to the beauty of compound interest, time is exactly what you need for your investments to grow. The longer you wait, the more money you need to invest each month to make up for lost time. If you start earlier, you can set aside less money and still come out on top in 25 years.

Putting All Your Eggs in One Basket

You’ve heard the advice to “diversify.” This means spreading your investments across a range of assets and securities.

Here’s an example of what that would look like: if you buy stock in only one company and the share price drops, you’re out a lot of cash! But if you own shares in a variety of companies, one stock performing poorly will affect a small percentage of your overall portfolio — which is why I’m a fan of index mutual funds and ETFs. You own a basket of stocks in a “sector” as opposed to one individual stock.

Ignoring Fees

Whenever you buy shares of a stock or fund, you pay fees on the trade. It’s unavoidable, but what you can do is minimize what you pay in fees.

For mutual funds, the adjective you want is “no-load” — this means you buy shares directly from the investing company, and not through a third-party advisor who gets paid a commission on your purchase. For index funds and ETFs, look at the expense ratio, which is the percentage of a fund’s assets that go toward the cost of managing a fund. Obviously, the lower the better.

Another thing you want to check are the trade fees, which is how much is costs to buy or sell a fund. It’s usually more expensive to buy a mutual fund and less expensive to buy an ETF. There are even a few ETFs with no trade fees depending on the company. While the fees alone shouldn’t be the only factor you consider when picking funds, there are a variety of low-fee options available.

Ignoring Taxes

Whenever you sell shares of stocks or funds, you pay taxes on your earnings if the money is held in a taxable account. Those are called capital gains taxes, and how much you pay depends on a few factors.

If you sell shares you’ve held for less than a year, that’s known as short-term capital gain, and they are taxed at your ordinary income tax rate. If you hold shares for a year or longer, those are long-term capital gains and they’re taxed at a lower rate (for most people the rate is 15%).

But remember, any gains within retirement accounts like Roth IRAs or 401(k)s aren’t taxable in the year that you receive it. Instead, Roth IRAs grow tax free, and you don’t pay taxes on the 401(k)s until you withdraw the money in retirement.

Freaking Out

The most important way to be a successful investor is to stay calm, even when the market is volatile. The more diversified your investment portfolio and the longer you hold onto your investments before selling shares, the less likely you’ll be affected by downward drops in the market. Also, if you continue to buy investments systematically throughout the market volatility this is called dollar cost averaging and can help lessen the risk of buying a single investment at a specific time.

If you prepare yourself financially by paying down debt and building up savings, investing for the first time shouldn’t be a scary experience. Pick your brokerage account with fees in mind, set up an automatic transfer each month from your checking or savings account, and do some research into what investments you’d like to make. Keep a level head in good times and bad, and let compound interest work for you.

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