Kids aren’t taught to invest.
Every year on Father’s Day we celebrate dads and what they taught us. But how much did dad teach you about investing? Not enough, suggests a MassMutual poll of 500 parents with children who graduated college in the past year. MassMutual found that 72 percent of parents wished they had taught their kids more about finances. According to a PNC Investments Millennials & Investing Survey, 62 percent of millennial respondents said their parents taught them to save money — but not how to invest it. If the seven investing lessons that follow weren’t part of your financial education, they should be now.
Saving is no substitute for investing.
Savings alone can’t build wealth. “Saving and investing serve different purposes,” says Drew Blackston, a registered financial consultant at Blackston Financial Advisory Group. “Your savings should be for emergencies, while investing is for money you’ll need 10, 20 or 30 years from now.” The difference isn’t subtle. Someone who has saved but not invested over the past decade would have missed out on more than 200 percent in market returns, says Chuck Mattiucci, senior vice president at Fort Pitt Capital Group. Blackston says his father David, the founder of Blackston Financial Advisory Group, taught him to save at an early age as a precursor to investing.
Time is money.
Young investors have a valuable commodity — time. “If there’s one thing that my father, who was a banker, should have taught me earlier in life, it was the time value of money and the magic of compounding returns,” says Ted Austin, a market leader for U.S. Bank Private Wealth Management. Michelle Herd, senior client advisor at TFC Financial Management, says investing $5,000 per year from age 25 to age 65 in an account earning 6 percent would result in more than $800,000. Saving that same amount in a CD earning 2 percent would yield only about $300,000.
You can’t just wing it.
The PNC survey found that two-thirds of millennials weren’t confident about retirement savings. You need clear investing targets and a plan for how much you need to save each month. “This planning will demonstrate the effect of inflation and rates of return on the probability of accomplishing your goals,” says Lou Cannataro, partner at Cannataro Park Avenue Financial. Blackston says millennials should strive to save at least 10 percent of their income to start with. Young investors should invest in a Roth IRA for the tax-free growth but shouldn’t neglect an employer’s retirement plan, he says. Contribute at least enough to get the company match, increasing contributions as your income rises.
Cash alone isn’t king.
According to a Charles Schwab study, 25 percent of millennials hold their investments in cash, compared to 19 percent of investors overall. Having cash on hand can help you ride out market bumps, but you need other assets. Jessica Landis, director of financial planning at Janney Montgomery Scott, says investors often ask the wrong questions. They wonder whether it’s a good time to invest or if a stock is a good buy, when the real question is do they have the right asset allocation. “Asset allocation is having the right mix of different asset classes to balance the risk you’re taking with the reward you’re likely to receive,” she says.
Moving parts should work together.
Your portfolio is like a car. Stocks are the engine powering growth while bonds are the tires, providing stability as you navigate rocky ground. Cash is the spare tire you keep in the trunk for emergencies. Diversifying with all three keeps the whole car moving. “Spreading your money across different assets and asset classes allows you to take smaller bets on a lot of different types of returns,” Austin says, versus putting everything on one horse. If your dad never taught you Diversification 101, then mutual funds and exchange-traded funds can help you build a balanced portfolio.
Fees are the enemy.
“Investment costs might not seem like a big deal, but they add up, compounding along with your investment returns,” says John Bartleman, president of online brokerage TradeStation. “You don’t just lose the fees you pay — you also lose all the growth that money might have had.” Investors can control those costs, says Bartleman, by comparing expense ratios of funds and trading commissions. “If you’re working with an advisor, expect them to get some compensation, and ask how much that is and what you’re getting for that fee,” says Jon Blumenthal, managing director at United Capital. And always be on the lookout for hidden fees.
Be prepared to go long.
Your dad may have encouraged you to go long when tossing around a football in the backyard, and the same principle applies to your portfolio. “Returns are not made overnight,” says Stein Olavsrud, executive vice president and portfolio manager at FBB Capital Partners. “Investors need to be willing to stick it out when the going gets tough, as any market cycle will have bad periods.” Adopting a buy-and-hold attitude early on can pay off because, Bartleman says, “the longer you invest, the more likely you will be able to weather low market periods.”
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