As the largest generation in history, millennials are increasingly joining the workforce, gaining capital, and figuring out how to balance their work, life, and financial goals. However, with overwhelming amounts of student debt and flat wage growth, investing for the future can seem like a lofty idea. Those in their 20s and 30s may find it difficult to imagine retirement or other long-term objectives, making it easier to put investing on the backburner.
But it’s important to remember what Albert Einstein is believed to have said: “The power of compounding interest is the most powerful force in the universe.” Investing early is essential for laying the foundation for building wealth. Once money is in an investment account, compounding allows that money to generate earnings from previous earnings, essentially making money on itself.
Millennials may think they don’t have enough capital to work with an advisor, but that shouldn’t be a deterrent to seeking advice. Perhaps the smartest investing decision to make is to begin working with an advisor. Millennials should look to work with a younger advisor who is building their practice. Often, firms will help first-time, young investors set up a plan with a budget and goals and can suggest some tips for streamlining financial obligations.
How to get started
A great vehicle to start investing is with an employer-sponsored plan, like a 401(k). Set up automatic contributions that are taken out of each paycheck and if your employer offers matching, contribute at least as much to meet that match. For young workers who may not be offered an employer-sponsored retirement plan, set up your own retirement account and contribute automatically every month.
It’s also essential to understand your personal risk tolerance, or how much volatility you can withstand in your portfolio. Generally, since millennials have a longer time horizon they can accept more risk than someone nearing retirement. Knowing how much risk you’re willing to take on can dictate your long-term strategy.
Creating a strategy
When it comes to creating an investment strategy, diversification is key to a sound portfolio. Instead of looking at individual companies to own, mutual funds can be a great starter investment. If you buy an individual stock, you are only investing in that company, but if you buy a mutual fund that owns 100 different companies you get a greater level of exposure. Additionally, it’s advisable for young investors to reinvest any dividends to produce a larger return over time, rather than cashing out short-term yields.
Having a diversified strategy can also help keep emotions in check. Since the market is cyclical, there will be times when it dips, but trying to time the market is a dangerous game. At the beginning of 2016, the market saw losses. Many people were concerned about their investments and wanted to pull their money out of the market. It’s an advisor’s job to quell fears so investors don’t get caught up in the day-to-day and sell at a low point.
In recent weeks, indexes have continued to hit all-time highs, so if investors pulled their money out of the market last year, they wouldn’t have reaped these gains. When investing for the long-term, try not to pay attention to daily fluctuations of the market. Daily volatility is to be expected, so it’s important to keep your overall strategy in mind.
Katharine Perry is associate financial consultant at Fort Pitt Capital Group, a registered investment management firm based in Pittsburgh.
The views expressed by contributors are their own and are not the views of The Hill.
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