Investing can be challenging for anyone, but for those in their mid-20s to mid-30s it can be especially daunting to try to build a portfolio from scratch.
On top of trying to figure out what stocks to invest in or how to balance those with bonds, younger investors also often have to deal with student debt and thinking about their first house. Plus, there may be some timidity about the stock market because the financial crisis of late last decade is a recent memory.
“There aren’t a lot of millennials investing,” says Kimberly Foss, founder and president of Empyrion Wealth Management and author of “Wealthy by Design: A 5-Step Plan for Financial Security,” noting that they watched their parents lose a lot of money in 2008. “They’re just scared.”
The fear goes beyond millennial investors. Investment management company Eaton Vance Corp. (ticker: EV), in a recent survey of 1,000 financial advisors, found that only 45 percent of those who are millennials believe volatility is normal, versus 73 percent of those from other generations.
“Millennial advisors tend to be much more anxious than advisors of other generations,” says John Moninger, managing director of retail sales with Eaton Vance. Millennial advisors also reported more concern than other generations about income, taxes and growth, he says.
As a result of fear, Foss says millennials are only using about 30 percent of their investable money to buy stocks. That’s low compared to a formula she recommends — 100 minus your age should be your percent exposure to equities — and means younger people are shortchanging their future, she says.
[See: 6 Famous Flameouts of Famed Investors.]
The important thing is to just start doing it, she says. Even if you put $25 a month into mutual funds, starting younger means your money has much more time to grow.
“Start investing as soon as you can,” she says. “You’ve got time on your side. Start with something you can afford and be consistent with.”
Jeff Powell, managing partner with Polaris Greystone Financial Group, recommends establishing a rainy day savings fund that sets aside three to 24 months worth of expenses, depending on how easy it would be to find another job.
He also recommends maxing out retirement account contributions. Even if your employer doesn’t match your contribution, the government’s tax treatment of contributions makes it well worth it, he says.
Planning for whether you want to buy a house is also important. If so, setting up an investment account to save for that isn’t a bad idea, Powell says. Otherwise, you can set up a Roth IRA, he says.
After maxing out 401(k) contributions — especially if an employer is matching — and setting up a Roth IRA, Foss recommends exposure to equities even if you have school debt. (If you have credit card debt that you can pay off relatively quickly, she says to do that first.)
For those wanting to take the plunge into stocks, there are several ways.
“There is no one way to invest and no one way for millennials to invest,” Moninger says. “The individual situations that account for student loans, income, dependents, obligations and long-term goals will vary person by person.”
He recommends hiring an advisor to help navigate these factors and help clients not miss opportunities because of increased anxiety about the markets.
“An advisor can help establish a plan, follow the plan and avoid some of the challenges of entering or exiting the market at the wrong time,” he says.
So-called robo-advisors have been becoming more popular, Powell says. These platforms use algorithms and modern portfolio theory to create portfolios based on investors goals.
[See: 10 Tips for Couples and Young Families to Build Wealth.]
For the average person who doesn’t have the time to research individual stocks, these program-based advisory services offer a more disciplined and less emotional approach than picking individual stocks, Powell says. “Where people get into trouble is when they believe they’re above average,” he says.
Over the next 10 to 15 years, Powell believes the most popular advisory model will be a hybrid of robo and in-person advising. “When the markets start tumbling, they’re going to want to have someone to talk to,” he says of investors.
A recent Global X Management Co. survey showed that some people aged 21-36 who are just beginning to save and invest, they don’t seek financial advisors’ services and prioritize low fees over other investment vehicle features. Another group often chooses to interact with robo advisors and apps rather than fin-person advisors and has a high comfort level with investing in a variety of financial instruments, but may be overconfident.
“We’ve learned that millennials crave personal attention and desire customized experiences,” Moninger says.
One thing that millennials want that may not be available with robo advising is a desire for customization, such as wanting to select more environmentally conscious companies, Foss says.
But it can be hard to get diversification when picking individual stocks, Foss says, adding mutual funds and ETFs offer those choices.
And if you’re going to pick a target-date fund, say, for retirement, make sure to understand how that is allocated to avoid getting surprised by aggressive, but more risky, investing strategies, she says.
Picking individual stocks can work if the investor has evaluated their situation and has an idea about how to build a diversified portfolio, Moninger says.
[Read: 4 Kinds of Insurance That Can Save Your Retirement.]
But engaging a financial advisor “helps ensure the millennial investor has examined the many factors at play, has appropriately weighed risks and established a long-term plan that can achieve many objectives,” he says.
More from U.S. News
10 Great Ways to Buy Emerging Markets
The 9 Best Investors of All Time
A Beginner’s Guide to Building a Portfolio originally appeared on usnews.com
