Yahoo Finance A millennial's guide to investing
For many 20-somethings the prospect of investing seems daunting. Between the alphabet soup of terms like TFSAs and GICs along with the commitment of plunking down hard-earned cash, jumping into the investing pool is something young people approach with caution — that’s if they do at all.
“What I find with young people, especially millennials that are in their later 20s or early 30s, is they kind of came of age at the time of the 2008 financial crisis and that has made them terrified of the stock market. They don’t even consider investing as an option,” Bridget Casey, president and CEO of Money After Graduation, says.
When it comes to your money, she adds that choosing to stash it away in a savings account opposed to investing it is a decision you can’t afford to make. In the long term, you will miss out on the opportunity to make hundreds of thousands of dollars.
“A young person can typically easily expect to make three to five per cent bare minimum and since the average stock market return is eight to 11 per cent, there’s no reason why not to expect over time that you would see that average rate of return or even greater,” Casey says.
Even at three per cent, investing would dwarf a savings account, which might give you 0.8 per cent in interest.
However, it’s not just fear holding young people back, it’s crushing student loans and other debt, which has put a strain on their finances, and together are adding to millennial’s hesitancy to start investing.
But for those wanting to make the most of their money, having some debt doesn’t mean investing has to be off the table entirely.
Myron Knodel of Investors Group’s Advanced Financial Planning unit says a combination of paying your student loans and investing through tax-efficient options like a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA) is the way to go, but that’s after you tackle your credit cards first.
“Make sure your credit card debt is all gone because the interest rates are fairly significant,” Knodel says. “The thing with interest on student loans is that there is a [tax] credit available for the interest that you pay.”
And chances are you can get started in investing for far less than you’d think.
“If you’re going to go with something really basic and simple like a mutual fund, you can get in with $25 or $50 to start that account. If you actually want to get into the stock market and use either a robo-advisor or manage your own portfolio — stocks and ETFs [exchange-traded funds] — then you need at least $1,000,” Casey says.
Mixing things up with a variety of different types of investments, or diversification, is always a good idea, too. Diversifying is important to cut back on some of the risk involved with investing, while still making it possible to make more money, says Jessica Liu, co-chair of the student financial literacy workshops Young Investor Program.
“Speaking with an advisor or filling out a risk assessment survey online can help you find the right balance for your current risk tolerance, which can in turn help you determine how you would want to diversify your portfolio,” Liu says.
Making the big decision
To better understand how young people can best decide which investment options are right for them, we’ve asked Knodel and Casey what they would recommend in two hypothetical situations young investors might find themselves in.
In our first scenario, John Doe, a 20 year old who is still in university, would like to get a head start on investing. He lives with his parents, so expenses are light. John also makes $10,000 a year.
Since his income is so low, Casey recommends he put his money in a TFSA and to get started with investing through a mutual fund or index ETF portfolio. She also says he should use robo-advisors, software that takes the guesswork out of investing.
“When you’re young, when you’re still in school, you don’t want to spend any time managing your money, you want to put all your mental energy into studying,” Casey adds. “He really wants to choose something hands off until he’s done school.”
Considering our 20-year-old would like to move out of his parents place one day, some of his money should be fairly accessible, and as that’s the case, Knodel recommends assessing how much he would need for the near future and what he can part with for a while and then invest accordingly.
“If he’s saving up for a car or something like that, I would say very conservative investments [like a] GIC,” Knodel says. “But if it’s long-term money earmarked for way down the road, he has 10, 15, 20 years of investment time available to him.”
With those longer term investments he recommends a mutual fund heavily weighted in equities.
In our second scenario, we have Jane Doe, a 25-year-old who has graduated from university and has gotten settled in her first job of her career. Things, however, are complicated by the fact that she doesn’t want too much money locked down in a long-term investment as she’d like to deal with any sudden challenges life throws her way. Her expenses are also high. While she doesn’t have kids, she lives alone in a major metropolis where things can get pricey quickly.
“She should have an RRSP and TFSA. Her focus should be primarily on her TFSA but she should get that RRSP started,” Casey recommends.
She adds that if Jane is planning to withdraw her money in anything sooner than five years for something like buying a home, Casey says she should stay out of the stock market entirely.
However, it’s at this age that our investor can take some risks, Casey says, so she recommends putting some money away in a TFSA until she is comfortable and then start investing for the long term.
“That’s a very real scenario where people are too scared to invest because they think what if I need the money?” Casey says. “You’re going to get another job. Even if you work at Starbucks, you’re going to be fine.”
Knodel says our 25-year-old prospective investor is going to have to make a trade off between stability and getting a high return on her investments.
“If it’s not long-term money, then I think I would stick to something like a conservative bond fund as a mutual fund or even guaranteed investment certificates, but I think those do pay a very low rate of interest, she wouldn’t be expecting a high rate of return in purchasing those, but then she’d have the stability that she needs,” he adds.
Regardless if you’re still in university or in the workforce or if you have a lot or a little disposable income, with all the money to be had through investing, it remains almost a necessity to reach both your short and long-term financial goals.
And wherever you are in your financial life, Casey says it’s never too early to start investing.
“The right time to start was yesterday, but the next best time is right now.”
