Imitation is the sincerest form of flattery, but it can backfire for investors. Following the herd can be dangerous in a volatile market, where buying or selling in tandem with the crowd could seriously undercut your retirement portfolio.
There is, however, a case to be made for taking cues from the next generation of investors. Consider the evidence. According to a 2017 NerdWallet survey, millennials significantly outpace the retirement savings rates of Generation X and baby boomers. The median savings rate among millennial parents ages 18 to 34 was 10 percent of income, compared to 8 percent for those ages 35 to 54 and 5 percent for the 55-plus crowd.
Besides saving more, millennial investors are getting retirement planning right in other ways. In a 2017 Charles Schwab survey, 64 percent of millennials said they were very or extremely confident about making investment decisions on their own, compared to 47 percent of Gen Xers and 39 percent of baby boomers. Fifty-one percent of millennials said that fees had considerable influence on their investment decisions, while four in 10 older investors said the same.
[See: 7 Investment Fees You Might Not Realize You’re Paying.]
Although millennials often get a bad rap for their financial decisions, it makes sense for younger investors to be savvier than previous generations, says Jordan Sowhangar, certified financial planner and wealth advisor at Univest Investments in Souderton, Pennsylvania. “The majority of millennials have either read or been told that they won’t be able to rely on Social Security benefits in retirement, at least not in the way their parents are or will be in the next few years,” she says. “Couple this with the idea that traditional pension plans are largely a thing of the past, and it’s enough to send us into planning mode.”
The 2008 financial crisis created an investing mindset among millennials that’s dramatically different from their parents or grandparents. Chris Battreall, certified financial planner and managing director at United Capital in Modesto, California, likens millennials to the so-called Greatest Generation that fought in World War II. “This is a group that’s thinking about the long term, is financially conservative in many ways and prefers financial security over luxury,” he says. A combination of heavy student loan debt, a challenging job market and stagnating wages only added to the pressure millennials feel to begin planning for retirement early, rather than counting on government programs or an inheritance to safeguard their futures.
If your investment strategy seems lackluster by comparison, consider adopting some of these millennial investor habits.
Retirements savings have high priority. Their own financial experiences and those of previous generations underscore the need for millennials to take the reins of their investments. Older investors, however, may veer off-course when saving for retirement conflicts with other financial obligations, says Jessie Weiss, certified financial planner and wealth manager at Plancorp in St. Louis.
These investors may be paying for private-school or college tuition for their children. In some cases, they’re helping with rent and living expenses for adult children. Meanwhile, “these extra expenses could derail their retirement goals,” Weiss says. Putting retirement ahead of secondary goals, like your child’s education, may seem selfish, but it’s necessary for building wealth.
Younger investors have a sense of urgency that older investors sometimes lack. “Millennials are saving more than older generations largely because they have to,” Sowhangar says. “In most cases, older investors have factored in at least one, if not two, guaranteed streams of income in retirement,” such as Social Security, a pension or both. Counting on these income streams can be problematic, however, if your personal savings rate isn’t enough to close a gap between your spending needs and retirement income. One way to gauge whether you’re on track for retirement is to tie your income to the value of your retirement assets, she says. “For instance, by age 50 you should plan to have four to five times your salary in retirement savings.”
[See: 7 Things That Can Derail Your Retirement Investing.]
If you’re short of that number, Chuck Mattiucci, senior vice president and financial consultant at Fort Pitt Capital Group in Pittsburgh, says there are three things you can do: work longer, save more or spend less. “Evaluate where you can make up the most ground and which will have the biggest impact.”
Keeping costs down is part of the savings strategy. Compared to other generations of investors, millennials are more fee-conscious, and easier access to this information contributes to their proactive approach. “People didn’t talk about investment fees 10 or 15 years ago,” Mattiucci says. “Previous generations didn’t save as well as millennials are now, and because of that, they have to work longer and may not be able to retire the way they envisioned.”
At the same time, new innovations make investing less expensive overall. Battreall says technology has made millennials more aware of value, especially when it comes to investing. “New tools like robo advisors with ultra-low costs and easy accessibility on their mobile devices are becoming more widespread, and millennials are more comfortable receiving financial advice from a computer program because that’s how they get most of their information anyway.” At the same time, costs for securities are dropping due to the rise of exchange-traded funds and fee compression in financial services.
If you’re working with an advisor, balance fees against the quality of the advice you receive, Weiss says. “Every fee you pay is less net return for you, meaning less money for retirement.” Finding out what you’re paying in fees is a first step. “Many fees are not transparent, and it could take asking a lot of questions and doing your own research to find out what the fees are.”
Risk is embraced in a smart way. A 2017 Legg Mason survey found that 78 percent of millennials polled planned to take more risk in the next year to capitalize on what may end up being the greatest bull market in history. While older investors typically become more conservative over time, there’s room for calculated risk in your portfolio.
Battreall says millennials tend to invest in individual stocks and low-cost ETFs that can provide access to almost any sector, including tech, biotech and other areas that are on the cutting edge of new breakthroughs. “Not a lot of old-school companies exist in their portfolios.” Although older investors shouldn’t abandon more established companies and sectors, they shouldn’t be afraid to explore new investment paths either.
[See: The 10 Best ETFs to Buy for 2018.]
Re-examining your asset allocation, in the context of your risk tolerance, investment objectives and time frame, can help you determine whether you’re on track to meet your goals. Your investment tastes don’t have to match the millennial’s precisely, but you should be taking enough risk to avoid underperforming. “The closer you get to retirement, the more critical a tailored investment strategy becomes,” Sowhangar says.
More from U.S. News
10 of the Best S&P 500 Dividend Stocks
7 of the Best Stocks to Buy for 2018
7 of the Best Tech Stocks to Buy for 2018
Older Investors Can Learn a Lot From Millennials originally appeared on usnews.com
