Overconfidence has a way of harming your portfolio, making you believe you know more about the market than you really do. What gets less attention is how a lack of confidence can be equally detrimental to your returns.
Low confidence has become the norm for many young investors. In a 2017 Wells Fargo survey, 53 percent of millennials said they’ll never be comfortable investing in the market. Twenty percent said they had no plans to ever invest. A similar study from BMO Wealth Management found that millennials are less positive and more apprehensive about investing than older investors.
This reluctance to invest and wavering self-confidence can be attributed in part to a fear of history repeating itself. “Millennials have been colored by the financial crises affecting them and also friends and family,” says Fredrik Axsater, head of strategic business segments for Wells Fargo Asset Management in San Francisco. Additional Wells Fargo survey data found that 41 percent of millennials have reduced their investments because of the effects of the Great Recession.
[See: 7 Stocks That Soar in a Recession.]
John Vaccaro, managing director at United Capital in Westport, Connecticut, says this generation’s lack of investing confidence may have even deeper roots. Social pressure to be successful, combined with the financial pressures of student loan debt and low salaries, can engender frustration and little confidence in general. The news only compounds the problem as “young adults are barraged with constant information on global, environmental, political and economic threats.”
When the stream of news millennials are getting is largely negative, that can color their opinions of the market. This can manifest itself in confirmation bias, or the tendency to seek out information that supports your point of view. Millennials may look for reinforcement from their peers on social media that they’re right to avoid the market. This creates a self-fulfilling prophecy, in which their lack of confidence keeps them from investing.
Too much information also can be overwhelming and lead to “simply not making any choices for fear of making a mistake,” Vaccaro says. Compounding the problem is that “young adults are afraid to look stupid when asking questions,” says Katharine Perry, associate financial consultant at Fort Pitt Capital Group in Pittsburgh. Whether it’s too much information or not enough that keeps an investor frozen in fear, the strategies for overcoming a lack of confidence are the same.
Tune out the excess noise. Constant updates about the market and the broader economy are pointless if they keep millennials from taking advantage of the biggest asset they have: time. “Financial planning 101 states that the earlier one starts investing, the better the probability of a successful long-term outcome,” he says.
When millennials let fear rule, the result can be serious financial problems later if they’ve stayed out of the market. The most important thing to understand is that “like the tide, the economy and markets dip and rise again.”
A long-term outlook can help younger investors tame the tendency to overthink investing. “A buy-and-hold strategy is particularly useful for a long-term objective like retirement because it eliminates some of the behavioral biases or emotions that can steer an investment strategy off course,” says Kate Magrath, vice president of iShares U.S. product management and strategy at BlackRock in San Francisco.
Buying and holding investments, rather than trading frequently, may seem boring, but over time, it’s a more reliable way to generate consistent returns. “If you don’t buy and hold, you can’t beat the indexes,” says Brad Zucker, a financial consultant and president of Las Vegas-based Safe Money Advisors. This strategy can also help millennials avoid buying high and selling low in a panic, which is “the opposite of an effective investment strategy.”
Don’t be afraid to ask for help. Millennials are the generation least likely to seek professional guidance with their investments. In the BMO study, 48 percent of millennials said they worked with an institutional or independent advisor, compared to 50 percent of baby boomers and 55 percent of Gen X. Seventeen percent of millennials said their biggest source of investing confusion was knowing whom to trust with their money.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
Robo advisors have emerged as an alternative to the traditional advisor model, but the do-it-yourself route can be a double-edged sword. “Right now, millennials’ DIY approach is building confidence because of our current bull market,” Zucker says, but their confidence may fizzle in a bear market when their gains plummet. Having a professional advisor on standby “can help during the rocky times.”
An advisor can help guide you toward the right investment decisions when your first instinct may be to sell. They can answer questions and help you understand which questions you should be asking, so your decisions are based on logic, not emotion. Education is key, says Magrath. “While past performance isn’t an indication of future returns, understanding how different investments have behaved historically, and especially under stress, may help millennials sleep better at night.”
When choosing an advisor, it may be helpful to interview multiple candidates before making a decision. “Trust can come from getting a good vibe from the advisor, having confidence that they have your best interest in mind, working with someone experienced and establishing a knowledge base,” Perry says. When all those pieces fall into place, that can help you feel more confident overall.
Formulate a plan and commit to it. A plan is a millennial investor’s best weapon. Just as sports teams have a game plan for winning and businesses develop a strategy for maximizing results, millennials should do the same, Vaccaro says. This plan should reflect their financial priorities and goals, such as investing for sustainability, buying a home, saving for retirement or giving to charity.
Investing without clear goals and a target return is like sailing a ship without a compass, he says. “There’s plenty of wind and chop to move you around, but without a compass to point the way, you’re unlikely to reach your desired port.”
[See: The Top 10 Investment Portfolio for Millennials.]
Having a plan in place can strengthen your belief in your abilities as an investor. Plus, you can always adjust your portfolio if you change the destination. “Nothing will build millennials’ confidence better than establishing their own set of goals, developing a measurable strategy and regularly monitoring their progress,” Vaccaro says.
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Millennials, Stop Doubting Your Investment Choices originally appeared on usnews.com
