When you think of investors, what do you see? Men in suits strolling down Wall Street? The Sad Guys on Trading Floors blog? Your parents chatting on the phone with their financial advisor?
A lot of Millennials don’t picture themselves as investors, and that’s a problem. According to a Facebook study on Millennials and money, our generation is 1.6 times more likely than Gen X and Baby Boomers to have no investments whatsoever.
A common theory is that Millennials don’t trust banks, brokers, and other financial institutions, but the study shows that isn’t the case. While 12% of Gen Y lacks faith in financial institutions and the economy, far more don’t invest because they don’t think they have enough money (54%) or don’t know enough about investing (24%).
It’s Not As Complicated As It Seems
Any movie about stock trading will have you believe that investing is something done by stressed-out dudes who yell a lot, draw charts on white boards, and speak only in confusing jargon. The reality is that investing is, and should be, pretty boring.
The internet has democratized investing, making trading as easy as online banking. Contrary to what many Millennials think, investing is not just for the rich, well-established, and knowledgeable. It’s through investing over a long time that you gain that wealth and experience.
While there are mutual funds that have high minimum investments, and stocks with share prices in the thousands, there are lots of affordable options — and they’re not just for beginners! Many experienced investors are looking for the same things you are: low fees, easy diversification, and set-it-and-forget-it investing accounts.
Contribute to Your Retirement Accounts
Let’s not forget one of the best ways to get started as an investor: retirement savings. Before you begin any other investing, contribute enough to your 401(k) to get your employer match. Don’t miss out on that free money! That means if your company will match 50% of what you contribute up 6%, you need to contribute 6% in order to receive the full 3% match.
Next, max out your Roth IRA with a $5,500 annual contribution (you can divide this up into smaller contributions throughout the year).
Important Info: Note that there are income restrictions on Roth IRAs. If you make too much money, you’ll no longer be eligible to make a contribution. Make sure that you qualify first!
Once you’re fully funding your Roth IRA, then increase your contributions to your 401(k) until you’re maxing it out ($18,000 per year).
Start Investing for Mid-Range Goals
If you’re already on track for retirement, you might want to open a brokerage account so that you can save for those mid-range goals that are more than five years away but happening sooner than retirement. There are many high-quality discount brokerage firms, but a few of my favorites are: Betterment (ease of use and no account minimums), Vanguard (the lowest fees on index funds), and Schwab and Fidelity (both have commission-free ETFs).
I often recommend exchange-traded funds (ETFs). Index funds are great for new and long-time investors alike, but they have have investment minimums (usually around $3,000 and up) that might make them cost-prohibitive. ETFs offer the instant diversification of a fund, but they operate like shares of stock. You can buy as little as one share of an ETF!
There are lots of ETFs to choose from at under $200 a share, so you can invest smaller amounts of money on a regular basis, rather than waiting years until you’ve saved up thousands to invest all at once.
Whenever you’re considering an ETF or index fund, pay attention to the expense ratio, which is the percentage of a fund’s assets that go toward the cost of managing the fund. It’s also important to find out the trade fee, which is cost to buy or sell the fund.
Time is On Your Side!
You become a rich old person because you started investing as a not-so-rich young person. Waiting until you’ve “made it” means you’ll never begin, and that could mean you’ll head into your retirement years without enough saved up to support yourself.
One of the biggest advantage Millennials have is time. A nice, long time horizon will help decrease the effect market volatility has on your investments. It’ll also allow your money to grow thanks to the magic of compound interest.
What’s compound interest? Let’s say you invest $1,000 in ETFs that average a 5% return. After a year, you’ve earned $50 in interest. For the second year, you’ll earn 5% not just on your original $1,000, but on that $50 too, for a total of $1,102.50! You’re earning interest on interest! Compound interest is the secret to making your money work harder for you.
No Time Like the Present
While the gloom-and-doom reports on the news make investing sound like a scary risk, the reality is that with some smart choices, you can set yourself up to build wealth over the years. Just remember the basics:
- Start by saving for retirement, and then pick low-fee investments that lead to a diversified portfolio. Diversification will help make that portfolio less risky.
- Hold on to and contribute to, your investments on a regular basis for a long time. (I’m talking decades! Just ask Warren Buffett.)
- Stop watching gloom-and-doom reports on the news. That’s just general life advice.