From an indulgence for avocado toast and artisan coffees to towering amounts of student loan and credit card debt, millennials do not have a stellar reputation for financial acumen and investing.
Beyond these stereotypes though, millennials are actually starting to come to terms with the tougher economic times that they are forced to deal with. Delaying home ownership and relying on ride sharing apps are just a couple of the many examples of millennials making smart decisions for themselves and their futures while still aspiring towards financial freedom.
However, investing is one of the main areas where millennials are still having a hard time coming to grips with financial realities.
Saving money and learning how to make it work for you, so you don’t have to, are essential to getting ahead in the modern world, but millennials are woefully ill-informed about the world of investing.
Here are the top 3 reasons that millennials should start caring about investing and looking out for their futures today.
Time Is On Your Side
The earlier you start investing, the less you’ll need to save in the long run for the same outcomes.
There are a number of advantages that millennials have in investing as a result of their youth and the long time horizon that they will be investing over if they wise up and get started earlier.
First there is the magic of compound interest. Compound interest doesn’t add up to much over a few years, but over a few decades at a steady return, such as the US S&P 500 index, compound interest will pay off many times over, turning even small contributions into a major payday.
Next there is the dollar cost averaging effect. If you are making regular contributions to an investment account over the years, you will be buying in at a number of market lows that will offer you great returns. Timing the market is hard, but if you are putting away a steady amount each year, then some of those years will inevitably mean you are getting stocks at a steal.
Lastly there are the small outliers that end up offering a major payday in the long run. Imagine owning some Apple or Google (now Alphabet) shares when they were only a few dollars each. A well-diversified portfolio will pick up a number of these stock market superstars over the years, leading to out-sized returns for investors who get in early and keeping putting in steady amounts of money.
The Taxman Loves Stocks
Stocks are treated as capital gains, which face a much less onerous tax burden than regular income or the interest from bonds.
Dividend payouts and capital gains from stock ownership face a 0% to 23% rate, depending on your income, while the top bracket for income tax can run as high as 43%. The taxman’s favor for stocks makes a big difference in the long run, and is a great reason for millennials to get into the market as soon as possible.
It’s So Easy, Even Your Parents Can Do It
Many millennials have reported being intimidated by their lack of investing knowledge, which is one of the main reasons why they wait so long to invest.
Don’t worry, it’s actually very simple.
Modern investment theory suggests that there is no way for the average person to outsmart the market, so they shouldn’t bother trying. By creating a diversified portfolio, investors are prepared to profit from any turn that the market takes and weather any downturns that would hammer unprepared investors.
Simple diversification is the key to ensuring that the money you are putting away keeps growing at a steady rate year after year.
An investment advisor can help you to build and maintain an optimized portfolio for meeting your individual investment needs. There are also a growing number of advanced ‘robo-advisors’, which are software programs that will build a recommended portfolio for you based on the information that you provide concerning your investing needs.
Investing is actually very simple if you follow a few basic rules and avoid the fear and greed of trying to time the market. Invest steadily in a diversified basket of stocks, and you will ensure that you come out on top no matter what the market brings.