The word “Millennial” has been more descriptive of a culture rather than a well-defined group. The Pew Research Center has made a best guess as to exactly how old this generation is, pointing to anyone born between 1981 and 1996.1 By this measure, the oldest Millennials are now 38 years old. They grew up during the dot-com boom where it seemed that technology drove the economy to new heights and likely heard how important it was to invest to get wealthy. They also lived through the financial crisis, and may have had a hard time finding work after incurring huge amounts of student debt. These experiences may have colored their view of the economy and how best to negotiate it.
It may be understandable then that Millennials, as a group, tend to be great savers. However, some observers have noticed that Millennials could be making better decisions when it comes to investment strategies. Make sure you’re avoiding the investment mistakes some Millennials are making.
1. Cash Heavy
The biggest mistake may be not having a retirement account at all. A study from Bankrate, a financial services company, finds that many Millennials are heavily invested in cash. That means they have lots of money in savings accounts and CDs, not so much in investments.2 The strategy is understandable given how the markets rocked the economy in 2007-2009. Yet, having a more diverse portfolio that earns a greater return than a savings account is the better strategy over a long time-horizon.
2. Fear of the Markets
The fear of stock market volatility may be a rational fear. However, it may counterproductive - erring on the side of stability can prevent these Millennials from creating a robust retirement fund. While a short-term hiccup can cause havoc with an investment portfolio, the data indicates that a diversified portfolio of stocks and bonds can produce a good risk-adjusted return over the long term. And with a projected life expectancy of another 50+ years, it is important for these Millennials to have a long-term perspective.
3. Blind Investing
Other research from financial services companies shows that Millennials are less likely to review investment portfolios or their 401(k) after they’ve initiated them. They don’t look to review and readjust portfolios for market changes. While they are relatively young, Millennials have the time to do more with their money. They can take more risks, which could mean market investments instead of cash. They can reallocate funds annually or when they start to earn more money. A diverse portfolio can help mitigate risk so that one wrong move won’t ruin plans. The relative youth of Millennials also gives them time to make a plan and invest towards a goal, whether it’s college or retirement.
4. Not Optimizing Employer's Match
If you’re not part of the freelance economy, you likely have an employer who will contribute to your 401(k), matching your contribution up to a preset maximum. Some employers will match your entire contribution or just a percentage of it. However, some Millennials aren’t taking full advantage of the employer’s matching contribution. If the employer matches your contribution to your retirement account at 100% and you aren’t contributing as much as possible, you could be missing out on thousands of dollars over time.
5. The Value of a Financial Plan and Investment Advice
Over a short period of time, the Millennial generation has seen great turmoil in the economy and in the world. They have seen more changes than their boomer predecessors have, and they continue to experience some uncertainty. Having a sound financial plan for retirement may help ease some concerns. Whether you’re starting out in the job market or have a strong career going full steam, it helps to discuss investment strategies and retirement plans with a fee-only financial advisor to make sure you're on the right track to meet your short, intermediate and long-term goals.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.