Best Investments for Millennials
Growing up alongside my fellow millennials both before and after college, I recognized that that the majority of us have little to zero knowledge in the areas of personal finance and investing in the stock market.
In fact, most millennials I speak with are uncomfortable speaking about money or their financial situation. My guess is that they act this way because they lack the knowledge on the subject. I can’t blame them since our traditional educational system does not teach us how to make, save and grow our money.
"I can’t blame them since our traditional educational system does not teach us how to make, save and grow our money."
If you are struggling to understand investing, how to start, or think investing is too risky, this post will solve these problems for you. Also since the more money you make the more you can invest, I discuss how you can raise your income by landing a high paying job, or give you ideas for making money with a side hustle.
Let’s dive in!
Invest in Your Knowledge
Our millennial generation is plagued by lackluster college degrees and an incredible amount of student debt. Most millennials earn on average $30,000 per year after college, if they graduate. I know a lot of millennials will agree with me, and our parents will eventually too, that the traditional education system is obsolete when it comes to most professions.
Guys and gals: we live in 2017! That means you can literally learn anything online for free (or pretty much close to it). Checkout websites like Coursera, Team Treehouse and Kahn Academy where you can stay ahead of the trending professions in the technology industry and choose an area that interests you in fields like marketing, business, finance, economics, software, etc. The list goes on!
Nowadays you even have the option of learning directly from a mentor that has already succeeded in a specific area like stock trading, social media marketing and real estate. Heck you can start your own business! The opportunities are endless.
To give you an example of how investing in your knowledge first is a wise choice, consider my personal situation: in less than two years I learned how to code and landed a job for $85,000 per year that required 3-6 years of experience. Guess how much my tuition was? A staggering $2,400 (that’s a 3,542% return my first year working). Talk about a return on my investment! If I can do it, so can you guys.
Just think by investing in your knowledge first, you will significantly raise your lifetime earning potential through your job and see other opportunities to sell your skills on the side. In return you will live a better life, and be able to realistically set and achieve your long term financial goals.
"In return you will live a better life, and be able to realistically set and achieve your long term financial goals."
Remember: to be able to invest, you need to be able to make more money than you spend so you can invest the leftover portion.
Invest in the Stock Market
Back when I first realized that finance and investing were my passions, I decided to run a survey to see where my millennial friends were at financially, and if they invested their money in the stock market. To my surprise, 50% of them did not invest and over 50% had less than $10,000 saved for retirement. Mind boggling!
Allow me to demonstrate why investing in the stock market is the single most powerful way to catapult your way to financial freedom, and is actually a lot less risky than you think.
The Power of Compound Interest with Investing
What is compound interest (CI)? Think of CI as multiplying growth times growth. If you have ever seen an exponential graph in your middle school math class, that’s what compound interest does to your money over time.
Consider the following realistic example: you have saved $10,000 by the time you are 21 and you invest that money in a low-cost index fund (more on this below) without adding another dime until you are 55 years old.
Over a time period of 20+ years, the stock market returns an 8% return on average. The result is that your $10,000 turned into $150,439 and generates $11,529 yearly without adding another dime. That’s a 1,504% return on your money.
Let’s say this time you add $200 per month until your 55. The result is your portfolio is now worth $574,565 and generates $46,348 yearly on a total investment of $91,600. That’s a 627% return on your money.
This all started with only $10,000 and you literally did nothing besides continue your contributions to the index fund once invested. How simple is that! CI is honestly the 8th wonder of the world! If you invest in your education first to raise your income, I don’t doubt you will be investing much more than this example.
Why Investing Is Not Risky
When I speak to millennials about investing their money in the stock market, the topic of investing is risky always comes up.
When I first started getting into investing in my early 20s, I was extremely hesitant to put my money in the stock market with the fear of losing it all.
This fearful mindset of losing my hard-earned money prevented me from taking the necessary actions to get started taking advantage of CI. If I couldn’t overcome this made up belief I created in my head, I was sure to end up putting my money in a savings account that earns less than 2% per year, or stashing my life’s worth under my mattress hoping for the best.
Both of these options were terrible choices since on average inflation is 3% each year which means that by not investing my money, it was guaranteed to lose this much value each year. While I agree some investments are risky, investing long-term in the stock market is not. Allow me to prove to you why below.
Tony Robbins’s recent book, Unshakeable, discusses 7 Freedom Facts (FF) that should free your mind of how risky investing in the stock market really is. The research and stock market data used in these FF discoveries dates back to 1900. Since I am numbers guy, I quickly realized the significance of these discoveries. The 7 FF are below:
On average corrections have occurred at least once per year since 1900, and on average only lasted 54 days.
Less than 20% of all corrections turn into a bear market. In other words, 80% of corrections do not turn into a bear market.
No one can predict consistently whether the market will rise or fall. This one is super important when you have people like Robert Kiyosaki calling for Doom and Gloom of the financial markets every month. Remember: “A man with a broken watch can tell you the correct time twice per day.”
The stock market rises overtime despite many short term setbacks. Checkout this graph for an amazing visual explanation.
Historically bear markets have happened every 3-5 years. They last anywhere from 2 months up to 2 years (average is 1 year).
Bear markets become bull markets, and pessimism becomes optimism.
The greatest danger is being out of the market.
These facts should make it very clear that when you invest your money long term in the stock market, your money will always increase in value regardless of world or financial events that occur.
If they do occur, it is a great idea to have a decent amount of cash ready to purchase amazing companies at huge discounts. Many people become wealthy in bear markets because they are greedy when everyone is fearful like Warren Buffett.
"Many people become wealthy in bear markets because they are greedy when everyone is fearful like Warren Buffett."
And if you’re curious as to where the average stock market return comes from, take a look at the graph below. Thanks to the research of Burton Malkiel in his book A Random Walk Down Wall Street, we can see that the longer we invest in the stock market the less volatile our returns and the average rate of return on your money converges towards ~8% (on the lower end) after 25 years invested.
I’m a Millennial: How do I get started investing?
In today’s world, there are so many options when it comes to investing your money in the stock market. This can overwhelm you if you’re just starting out which can lead to investing your money in the wrong funds, not taking advantage of tax-deferred accounts or allowing a financial adviser to invest your money for you resulting in obscene fees that eat away at your nest egg.
Below I have listed several different options for you to get started investing your money in the stock market from least to most difficult:
- Robo Advisers: companies like Wealthfront and Betterment use computer algorithms that automatically create and manage your investment portfolio based on your risk tolerance. Typically these portfolio consists of various index funds.
- Index Funds: develop a diversified portfolio of low-cost index funds covering all asset classes such as small, medium and large cap domestic and international index funds, Real Estate Investment Trusts (REIT), emerging markets and government bonds.
- Single Companies: buy stock in a company that you believe will be a great long term investment. This option requires the most work since you need to understand how the company makes money and operates, and its future plans for growth. This method has been termed Value Investing by Warren Buffett.
By investing in index funds, you own a small percentage of all the companies that make up that index. For example the S&P 500 is a large cap index that is made up of the top 500 U.S. companies. When those companies make money, so will you.
Furthermore you can invest your money in tax-deferred accounts such as a Roth IRA, a traditional IRA, a Roth 401(k), or a 401(k). To learn about the differences between them, I have created this spreadsheet for you.
This should give you plenty of actionable information to get started investing your money in the stock market. If you have any questions I would be more than happy to answer them for you.
This blog post was also featured on FreeUp.
About the Author
Ocean engineer by formal education, self-taught software developer, and long-term investor in the stock market. Recognized the power of investing his money at an early age. Brian has been successful at implementing long-term investment strategies for his clients, actively manages an investment club fund, and is focused on teaching people how to invest their money to achieve financial freedom.