Best Investment Strategies for Millennial Investors

Millennials are a segment of the population that has endured many financial hardships, thwarting their efforts to build wealth — but there are investing strategies they can adopt to balance their obligations while allocating funds toward growing a stable financial future.

There have been many investing trends in 2020 that millennials can tap into to deepen their financial literacy, understand the value of their investments and, more broadly, increase their well-being for the long term.

Whether you want to take an active or passive approach to investing, there is a strategy out there millennials can follow to start enhancing their wealth. Here are some options:

— Investing with debt.

— Index funds.

— Individual stocks.

— Increasing wealth creation among millennials.

[READ: Fractional-Share Investing — Where to Invest.]

Investing With Debt

Trying to build wealth can be challenging when you hold an excessive amount of debt. If your net worth is bogged down by liabilities, you may find it difficult to save, invest and see your assets flourish.

According to a 2020 report by Bank of America, millennials are increasing their savings but are “still carrying substantial debt and juggling competing responsibilities.” This condition is not conducive to building wealth, especially as living expenses are increasing.

Auto loans, student loans and credit card debt were among the most prevalent financial hurdles millennials face that prevent them from investing. But experts say millennials should not miss out on the advantages long-term investing provides even if it means allocating small portions of their income consistently.

“With investing, you can get a higher return, and you don’t want to waste 10 years of compounding growth to pay off debt,” says Ryne Vickery, wealth advisor at Buckingham Strategic Wealth in St. Louis.

It’s common to want to pay off your debt and then start investing, Vickery says, but more often than not, you’re better off doing a combination of the two.

“Credit card debt is the highest priority to get paid off before any investing takes place. In the case of student loan debt, you can refinance to a lower rate. Pay those off aggressively but not solely,” Vickery says.

For millennials, debt doesn’t mean holding off investing; rather , it requires an approach that balances both your current and future needs.

[See: 9 of the Best Gold ETFs to Hedge Volatility.]

Index Funds

Investing in index funds involves holding a security, mutual fund or exchange-traded fund that holds a bundle of securities that aim to mimic a U.S. market index to match its benchmark performance.

Index funds have low costs, little to no management fees and, with the democratization of investing, people can start investing in these funds with as little as five dollars through an online brokerage. The many flexibilities of indexing can be an ideal way for millennials who are cash-strapped to start building wealth.

There are many risks in investing, but the characteristic that makes index funds a safer option for millennials who have low risk tolerance and cannot afford to lose a ton of money is diversification. This means your losses may be minimal when there are stock market swings.

“The best way to build your asset level is to invest in a weekly or monthly basis and invest it in a diversified index fund,” Vickery says.

There is no age-specific strategy when it comes to indexing, but experts recommend dollar-cost averaging — an investing strategy that involves regularly scheduling a certain dollar amount to investments. This method reduces volatility and can help millennials work on saving for retirement.

Dollar-cost averaging may give you the chance to buy more shares at a reduced price and fewer shares when the price increases, instead of buying an investment in a lump sum all at once. “If you can dabble a bit every month, you get the ups and downs and have much more calculated long-term advantage,” says Craig Jonas, impact investing expert and CEO of CoPeace, a Denver-based holding company focused on social and environmental impact.

The proliferation of index funds has been flooding the market, and experts say there are ample opportunities to hold investments that you can identify with — a trend that is a focus among millennials.

With index investing, you can be more consistent with your values, says Jonas.

“A factor for best investments for millennial investors is young people like the idea of following their belief system. The fact that there are options now could encourage them to invest and find the education they need to get there,” Jonas says.

The potential benefits of investing in index funds could be an alternative to individual stocks depending on millennials’ financial situation, goals and risk tolerance.

[READ:Sign up for stock news with our Invested newsletter.]

Individual Stocks

For active investors who have the time to stay on top of their portfolio and intend to increase their return on equity, selecting profitable companies can be a demanding but rewarding option.

With the ease of use on robo advisors’ intuitive mobile platforms and the advantage of fractional shares giving access to more market participants, retail investors have increased their trading activity in 2020 — but the excitement may blind them to the risks of investing in individual stocks.

“Due to the high volumes of trading activity, stock prices appear to be artificially inflated from millennial enthusiasm — I think there’s some danger there,” Jonas says.

Unlike index funds, in which there is diversification among different asset classes, individual stocks are only concentrated in one security. This means there’s no safeguard for investors when prices slump.

“If people were reading up on a stock’s information and comparing it to historical trends, it may scare people into not spending as much,” Jonas says.

The level of trading activity can also be viewed from an optimistic standpoint. Despite the current volatile nature of the markets, investors are drawn to short-term day trading — a method that involves higher risk but comes with learning important lessons about investing.

“I support the concept of losing some money as a way to educate investors to learn markets in a meaningful way,” says Pierce Crosby, general manager at TradingView, a social network for traders and investors in New York City. “Trial by fire is the way people learn how to invest.”

“If you put $500 in an investing app and the value of that changes, it’s an emotional response to get out, but as a result, you learn the risks in real time — it’s hard to explain risk management when people don’t have a concept of what that means from an investing standpoint,” he says.

Technology has given young adults the power to access information through the convenience of their smartphones, handing them an abundance of knowledge on how to navigate their investments. In many cases, this has driven them away from financial advisors and toward a self-directed approach.

“As a general rule, it doesn’t make sense to have an advisor until you’re at a certain income or asset level because the cost may be too high,” Vickery says. That said, he adds that the value an advisor brings far outweighs the costs.

“At some point, managing assets gets too complex, and it makes sense to have a plan because it’s easy to get to a point where you don’t know how much risk you’re taking,” Vickery says.

Increasing Wealth Creation Among Millennials

There are many resources to get started in investing, but the challenge of providing access to those resources to those who need it, particularly underserved communities, remains.

Since every investor comes from a different financial background and has their own unique goals, there’s no standard road map for early stage investors. Experts recommend getting to know your personal goals to realize your path in becoming an educated investor.

Instead of getting caught up in chasing short-term high rates of return, it is more beneficial to have a long-term growth outlook on your investments.

“We encourage people to slow down and take a thoughtful look at where a company is going to be in five to 10 years versus the intraday trading movement,” Crosby says.

Crosby points to assembling small communities in which people can learn and grow their knowledge about building long-term wealth together.

“Developing support networks is a helpful starting point for people to build filters of information they receive. Otherwise, it’s easy to get overrun by tons of different sources,” he says.

Building a social network is the best way to create a process so people can access feedback and collaboration between parties, he adds.

Crosby says, “There’s great value in bouncing ideas off of one another because there’s a large diversity in opinions and working together is a natural winning strategy.”

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