When it comes to investing, your Grandma can teach millennials a thing or two.
Most grandmas get it. They understand stocks and other growth investments in their portfolio help them keep up with inflation.
It’s the millennials who need to learn to walk on the wild side.
What’s the problem?
When you’re a young investor, time is on your side.
You don’t need your money for decades, so you can invest aggressively and watch the dollars compound over time.
There’s a good reason Albert Einstein quipped that “compound interest is the eighth wonder of the world.”
By investing as early as possible, staying invested over time, and choosing growth investments, millennials definitely have what it takes to build impressive portfolios.
There’s only one problem.
They tend to blow it on bad investment choices.
Many young investors favor retirement accounts with far too little in stocks and far too much in safe, guaranteed investments (it’s an investment truism that safe, “low risk” investments almost always translate into “low returns.”)
By investing too safely, millennials squander the most powerful investment force on their side – compounding over time.
That’s why “playing it too safe” is the biggest investing mistake that millennials make, explains Charlie Wells in a column on common money mistakes for The Wall Street Journal.
“Twenty-somethings don’t take enough risks with investments to build up big returns,” he observes.
Research shows that millennials mistakenly chose portfolios “more appropriate for employees nearing their retirement, rather than starting their careers,” says Lindsay Larson, an assistant professor of marketing at Georgia Southern University’s College of Business Administration.
Why do millennials goof it up? Researchers find millennials have low levels of financial literacy, and struggle with investment decision-making and risk taking because they fear making mistakes. One theory attributes this to growing up during periods of extreme financial uncertainty, like 9/11 and the 2008 financial meltdown.
What’s the fix?
Millennials can learn a lesson or two by watching how grandma and baby boomers invest. Your typical millennial holds an astonishing 70% of assets in cash, says investment company Blackrock. That’s more than baby boomers and even older investors keep in cash.
Here’s some tips:
Find your personal style. Just like with fashion, make sure your portfolio is tailored to you. It should be a good fit for your age, time horizon, and goals, and satisfy your risk and return objectives.
Follow the road map. If you’re uncomfortable making investment decisions, consider using a target-date retirement fund in your 401(k). The fund managers will pick an appropriate allocation for you, and adjust it over time as your needs change. For example, if you’re 25 years old, you can invest in a target-date 2055 fund designed for someone like you retiring in 40 years, or around the year 2055. The typical 2055 fund is designed for maximum growth and holds about 85-95% of the portfolio in stocks and only 5-10% in bonds. As you age and get closer to your retirement goals, that mix will get more conservative, reducing stocks and adding bonds and other lower risk investments.
Leave the driving to others. Need more help? Use the services of a computerized (robo) or human financial advisor to keep you heading in the right direction. While every investor needs some cash for emergency needs, missing out on growth – especially when you’re young – can be a damaging mistake investors can’t easily recover from.