Millennials and Investing


Investing is a huge part of future financial well-being. Unfortunately, according to a recent UBS report, millennials are the least likely generation to have general investment knowledge (65%) or to feel confident about their investments (31%). A separate report showed that 39% of those under 30 chose cash as their preferred way to invest money, meaning they don’t put it in the stock market. 

Investing as a concept can be simple. For our purposes here, we define it as buying a productive asset. This asset (a business, farm, house, or college degree) is productive because it pays you more than you put in. It creates a cash flow that is greater than the original investment. Contrast this with lending (a CD for example) where you don't own anything, you just have an IOU.

So what's so great about investing? The key thing to remember is a well diversified mutual fund should earn 6-7% per year over the long-term. There is no better wealth-generating machine on the planet. But, the ride will be bumpy in the short term (think the Indiana Jones ride at Disneyland). The right thing to do is just hang on. Close your eyes if you have to but don't bail out.

People can be reticent to invest because it seems confusing and scary, especially if you didn't grow up hearing about it. The stock market is full of fancy terms, alarming headlines, and promoters. Underneath it though is a quiet reality of low-cost index funds that are a fine long-term bet.

There are a lot of strategies out there that claim to make you rich, so it can be hard to determine which to trust. Our strategy is pretty simple, and focuses on your long-term financial stability: invest in a low-cost ETF or mutual fund and hold it for a long time. If you invest $3,000 in the S&P500 fund at Vanguard, for example, you'll own a sliver of 500 companies and your annual fees will be under $10.

Beyond the stock market, there are a lot of smart ways to invest. For example, Steve's father was a forester and bought timberland; he knew what he was looking for and did very well. He held one property for 51 years and the value grew about 11% per year! In other words, over those 51 years it grew to be about 200 times more valuable than what he originally paid for it. Rental real estate is also a good way to go. It can be a nuisance to manage, but someone else pays your mortgage and the property's value goes up over time. Finally, a college degree can be a terrific investment. The less you pay for a good school and the more marketable the degree, the better the return.

Not saving and not investing is largely a result of being indecisive or uninformed. If it helps you get started, set short-term, medium-term, and then long-term goals; but the key is to begin. Make a to-do list and keep to it! The consequences of not doing so are high. The Center for Retirement at Boston College reports that waiting to invest until 45 means you’ll have to spend 3 times as much to have the same retirement than if you started at 25.

The average 65-year-old today has a net worth of $200,000. To make that small nest egg last, it means they will live on roughly $8,000 per year, plus social security (and sometimes a pension, although these are getting rare). It doesn't have to be this way, and you don't need to earn a fortune to have more to retire on. If you do a few things well, consistently, and over a long period of time, you should end up with over a million dollars in today's dollars. 

Savings and investing really only work well as habits: if you pay yourself first, don't time the market, and quit making excuses as to why you can't do it! Without a pension, it's almost impossible to save enough for a good retirement without investing in productive assets (e.g. stocks, businesses, real estate, farms, timberland, etc.). The common theme here is these assets produce something and grow in value or generate cash flow (note that other possible investments like CD’s and gold don't do this).

Investing in productive assets may risky, but it's important to not confuse volatility with risk of loss. Most productive assets are volatile in the short-term but quite reliable in the long-term if you stick to main stream investments that are well diversified. You can start small if you have to. 

The takeaways are to save early and consistently, and invest for the long-term in productive assets. It's amazing how doing small things right over a long period of time can lead to terrific results.

Time is on your side; so get going!


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Jenny Clark