The now-volatile stock market may not be the ideal starting point for new investors, but it’s always a good time to begin investing.
Millennial Americans — ranging in age from 22 to 40 — are famously wary of the financial markets. Market collapses like the dotcom bust of 2002 to 2004 and the financial crisis of 2008 will do that.
“They saw huge swings in the market, and it made them more conservative,” said certified financial planner Matthew Ricks, a millennial himself at 39 and president of Haystack Financial Planning in Syosset, New York. “The flip side is that many of them have missed out on the biggest bull market of all time.”
Young investors, however, have the great advantage of time. The power of compounding returns over decades is enormous if you save consistently and invest in the financial markets. You can start small but get started.
Here are five things for young investors to keep in mind.
1. Pay off credit cards first
Investing is always a good idea … unless you have a fat balance of high-interest-rate debt sucking up cash flow.
“If you have credit card debt with a crippling interest rate, pay it off before you start investing,” said Amanda Campbell, a certified financial planner and vice president at Wealthspire Advisors in Fulton, Maryland.
With an average rate of 16.15% on credit card balances last year, according to the Federal Reserve, you’ll almost certainly lose more in interest costs than you’ll make in the markets. “Saving in a 7% [return] pocket while feeding a pocket that drains you at 20% or more doesn’t make sense,” she added.
Lower-cost mortgage debt or even student loans needn’t stop you from investing, according to Campbell. “Just as long as you’re not fighting some insane interest rate.”
2. Know your goal
Every dollar should have a purpose, said Ricks. What you are saving for should determine how or if you invest the money in public markets.
“If you’re saving for retirement in a 401(k), it will look different than if you’re saving for a down-payment on a house,” said Ricks. “If you want to use the money within a few years, don’t put it in the stock market.”
A certificate of deposit, a money market account or possibly a Treasury bond will ensure that the money is there when needed to serve its purpose.
3. Know yourself
How much do you hate losing money? If the answer is a lot, you should invest accordingly. “Be honest with yourself,” suggested Ricks. “If you want to follow the hot trend but can’t stomach the ups and downs, know that about yourself.”
Millennials are known for being conservative. “I’ve reviewed a lot of accounts for millennial clients and colleagues, and they are generally not as aggressive as academics say they should be,” said Ricks.
That said, you don’t have to jump into an 80% stock portfolio that might be “appropriate” for a 20- or 30-year-old. Start where you feel comfortable and you can make changes as you go.
You may not know what your tolerance for investment risk is yet, but you’ll find out when markets fall. “It comes down to whether you can sleep at night without worrying about your investments,” said Campbell.
4. Keep it simple
It’s hard to argue with a 30-year-old who put all their savings into bitcoin five years ago, but a little information can be a dangerous thing when it comes to investing. Cryptocurrencies, meme stocks and hot technology companies have generated some incredible returns, but they can also produce huge losses, and a 50% decline can be demoralizing for investors just starting out.
“Invest in something simple like an S&P 500 Index fund to get your feet wet,” suggested Campbell. “Put enough in to see how it affects you, and if you’re comfortable with that, then you can consider other things like individual stocks.”
If you are a believer in cryptocurrencies or like to track technology trends, pursue your interests. However, invest with your long-term savings goals in mind. In other words, do not go all in.
“Treat that like Vegas money,” said Campbell. “Be prepared to lose it.”
5. Find help
The objective of investing is long-term growth and getting advice on how to allocate assets and build a portfolio for long-term performance is invaluable. Young investors may not have enough assets to hire a financial advisor, but online platforms like the robo-advisors and brokers like Schwab, Fidelity, and Vanguard have huge resources to help you build an investing plan. Take advantage of them.
“You don’t have to do something crazy, and you don’t have to do it alone,” said Campbell.