When it comes to retirement, millennials have some lofty goals. According to a recent JPMorgan Chase & Co. study, today’s 20- and 30-somethings are aiming to retire by age 60, nearly a decade sooner than their baby boomer counterparts.
To reach that goal, the study suggests that millennials would need to adopt an aggressive savings strategy while seeing decent returns from the market. That sounds reasonable in theory but there’s a hitch — the majority of millennials aren’t rushing to invest in stocks.
A Bankrate study published earlier this year found that just one third of 18 to 35-year-olds play the market. Among the top reasons for avoiding stocks? Millennials say they’re too risky and they don’t know enough about them to feel comfortable diving in.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
Steering away from actively trading individual stocks can minimize risk but retirement savings may suffer in the process. Investing passively, on the other hand, presents a middle ground for younger investors who don’t want to shortchange their nest eggs.
Real estate as an alternative to stocks. Investing in real estate offers numerous benefits to millennials who are concerned about the stability of stocks, according to John Snowden, portfolio manager of the Resource Real Estate Diversified Income fund.
“Unlisted real estate as an asset class is much less volatile than equities since it’s not listed on the stock market, which can fluctuate considerably from day to day,” Snowden says.
Unlike stocks, which can be affected by larger changes in the global economy, U.S. real estate is slower to react to major market shifts. Snowden points out that historically, research suggests that real estate has produced the greatest returns of any investment class over a 10- to 20-year horizon.
Deciding what kind of real estate investment vehicle to put your money in is critical to your long-term goals.
If you want a truly passive investment, a real estate investment trust may be a good fit. On the other hand, owning a rental property has some advantages for millennials who are looking for passive income and don’t mind doing a bit more legwork.
Mark Ferguson, a Realtor and founder of Invest Four More, says millennials have some choices for getting started in real estate as a property owner.
For example, a younger investor could buy a property as an owner occupant, live in it for a year, then rent it out. As an owner occupant, Ferguson says it’s possible to put down 5 percent or less on the property. That may be appealing to a 20-something who hasn’t had time to save up a lot of cash.
Buying multi-unit properties, such as a duplex is another option, but it may require a bit more capital upfront to cover the down payment. Ferguson has some advice for millennials who want to keep their property investments on track.
“Make sure you figure up all the expenses, including maintenance and what you’d have to pay during a vacancy. Most landlords forget about these costs,” Ferguson says.
[See: 6 Famous Flameouts of Famed Investors.]
Ease into the market with exchange-traded funds. Exchange-traded funds often make sense for millennials for a number of reasons, says Sean O’Hara, president of Pacer ETF Distributors in Paoli, Pennsylvania.
Exchange-traded funds, which combine aspects of index funds and stocks, generally have lower costs than traditional mutual funds. Besides that, they also tend to be more tax-efficient, both of which can benefit a millennial’s bottom line, O’Hara says.
Thomas Walsh, a certified financial planner and portfolio manager with Palisades Hudson Financial Group’s Atlanta office says ETFs are especially well-suited to novice investors who are seeking broad diversification in a single investment.
He points out that exchange-traded funds won’t necessarily help younger investors beat the market, they can offer some tangible results in terms of your retirement savings if you’re playing a long game.
Walsh advises millennials to keep it simple when investing in exchange-traded funds so there are no unpleasant surprises.
“When choosing an ETF, make sure that it tracks a respected index you’re able to understand. The more basic the strategy, the better to avoid being caught off guard when your investment is underperforming,” Walsh says.
Incorporate dividend stocks in your passive income plans. Dividend stocks provide a steady stream of income that millennials can reinvest for their retirement but they should be aware of the risks, says Kei Sasaki, regional chief investment officer for Wells Fargo Private Bank in New York.
“There’s a widespread perception that dividend stocks are safer but investors must keep in mind that dividends are supported by the earning power of the issuing company,” Sasaki says.
In other words, dividend payouts aren’t guaranteed. Bottom line, millennials need to be aware that even though dividend stocks can provide tax-efficient income over the long term, they’re still taking a gamble with these investments.
Brian Califano, cofounder and managing partner of New York-based AcceleratingCFO, points to yield as the best way to evaluate dividend stocks.
In simple terms, yield measures the price of a stock relative to the dividend being paid out to investors. The higher the yield percentage is, the more attractive a stock is because it signifies a low stock price and a healthy cash flow.
Califano says the secret to investing in dividend stocks for millennial investors is consistency.
“Make investments in regular intervals, no matter how small or insignificant it may seem,” Califano says. “Investing is a marathon, not a sprint — the longer you stay in, the greater the rewards at the end of the rainbow.”
Tread carefully when building a passive investment portfolio. Millennials who are interested in passive investments need to have a game plan in place first, Sasaki says.
“When building any long-term investment portfolio, investors should start the process by developing a sound financial plan,” Sasaki says.
Some of the things younger investors need to consider when choosing passive investments? Their time frame, the kind of returns they’re after, the level of liquidity they’re comfortable with and the tax considerations.
Ashley Bleckner, a certified financial planner with RS Crum in Newport Beach, California, says investment costs are another important consideration for millennials.
Unnecessary fees lead to reduced returns, Bleckner says, so you need to run the numbers on things like trading costs and fund expenses if you’re investing in the market.
Most importantly, she urges young adults to keep their feelings in check when building passive income for retirement.
[See: 7 Notable Quotes From Warren Buffett.]
“Many people struggle to separate their emotions from investing,” Blecker says. “Markets will go up and down but reacting to current market conditions may to lead to making poor investment choices at the worst times.”
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4 Passive Investments Millennials Can Use to Fund Their Retirement originally appeared on usnews.com
