BY ANDREW HEIKKILA
If you’re like me, you’re a Millennial who’s been pretty good at saving. Unfortunately, if you’re like me, you’ve also been holding onto that money in a bank account or under your mattress, instead of making that money work for you.
Investing is an intimidating idea for many, especially if they lived through the havoc wreaked by the 2008 recession. In fact, according to a recent Harris poll, 80 percent of Millennials aren’t invested in the stock market at all. The one thing Millennials have been good at putting money into? Their 401(k) plans, according to a study by Vanguard.
Nevertheless, Millennials are beginning to enter their prime earning years, and if the only thing stopping them from investing is fear of the unknown, they’re making a potentially expensive mistake. Here are the top 5 personal finance rules for Millennial investors.
1. Learn the Lingo
This advice holds true for whatever unknown you’re getting into. If you don’t know how to talk about investments, how will you ever be able to actually invest? Here are a couple of terms for you to start off with:
- Assets and Asset Allocation: An asset is simply something that has the potential to earn you money. Assets can include cash (usually in the form of certificates of deposit, treasury bills, or money market accounts), stocks, bonds, commodities, or real estates. Asset allocation is simply how you’ve divided your assets, or your investment strategy. By choosing investments in different sectors, industries, and geographic locations, you’ll build up a diversified portfolio where your risk is spread out.
- Ask and Bid: An “ask” is the lowest price that an owner of an asset is willing to sell it for. A “bid” is the highest price a buyer is willing to lay down on an investment. Nowadays, these asks and bids are often matched up on electronic platforms and exchanges.
- Bull and Bear Market: A bull market is a market that is trending up, and that your investments are likely to grow in. If you are “bullish” or considered “a bull” that means you think the stock price will rise. A bear market is the opposite, when the market is trending downward, and a “bear” or “bearish” person is somebody who believes stock prices will drop.
- Capital Gains and Losses: Capital gains or losses are the difference between what you buy an investment for and what you sell it for. If you incur a capital gain, you’ll be subject to taxation, while capital losses can be written off. Most investments mature over a long period of time, and long-term investments are subject to different capital gains taxes than short-term investments–more information on that here.
- Dividends: In some cases, a company will offer some of its income to be divided amongst shareholders. Dividends are oftentimes paid regularly–monthly, quarterly, semi-annually, or annually–but sometimes are offered as a one-time incentive.
- Exchange: An exchange is a place where investments and assets are traded, bought, and sold. Some of the more famous stock exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. Exchanges aren’t necessarily located in physical locations nowadays, as many exist online.
- Yield: Yield is the ratio between stock prices and the dividends paid on those stocks. So let’s say you buy a certain amount of stock at $100 per share, with a dividend that ends up netting you $10 extra per year. This would amount to a 10 percent yield.
For even more beginner terms, you can check out this post by Miranda Marquit at investorjunkie.com.
2. Learn the Principles
According to Benjamin Graham, the mentor to one of the most successful investors of all time, Warren Buffett, there are tactics and principles to investing that one should follow. His ideas are recorded in his books “Security Analysis” (1934) and “The Intelligent Investor” (1949), and have been distilled by Investopedia into three principles.
- Principle #1: Always Invest With a Margin of Safety – The idea of a “margin of safety” boils down to purchasing an asset at a significant discount to its intrinsic value. This allows you to make fewer risky investments but still enjoy higher returns.
- Principle #2: Expect Volatility and Profit From It – Every market is volatile to some degree, and you may be hesitant to hold on to assets that seem to be tanking in value. However, the investor who lets their emotions (instead of their logic) control their actions is begging to lose money. Graham’s strategies for mitigating the unwanted effects of volatility are dollar-cost averaging and making investments in stocks and bonds.
- Principle #3: Know What Kind of Investor You Are – You need to decide whether you’ll be an active or a passive investor (or “enterprising” vs “defensive” investor). The only difference is how involved you want to be with asset selection. If you do decide to be active, you might want to decide between “speculating” vs. “investing”.
3. Drop Your Bad Financial Habits
Beginning to invest represents adopting good financial habits, but it doesn’t necessarily indicate that you’ve dropped the old, bad ones. At the very least you have some money to invest–but are you maximizing your financial potential? Chelsy Meyer writing for Fiscal Tiger mentions that five of the most common bad habits are:
- Paying Bills Late
- Ignoring Debt
- Spending Incorrectly
- Not Saving
This is obviously not an extensive list of bad financial habits, but all or a mixture of any of these are correctable and will benefit you in the long run. Nobody is perfect, and some people might miss a credit card payment here or there–but realize that these bad habits snowball. Nip them in the bud and your future self will thank you for it later.
4. Learn to Take Risks
This goes along with the principle of expecting volatility. Think of it this way: every time you get on a plane, you take a calculated risk. You realize that there’s a certain degree of danger and excitement, but the first sign of turbulence doesn’t make us jump out with a parachute, does it? No, we wait out the ride because we need to get where we’re going. Or here’s another one: many of us lived through the real estate crash in 2008, and Canadians were worrying that their housing market might just collapse earlier this year. Does that mean that none of us are going to buy homes, or invest in real estate ever again? Of course not. Renting is great, but buying property is an investment that expresses itself over time.
Nevertheless, when it comes to risk, it’s extremely important to be cautious, and knowledgeable. Fraudsters are out there, waiting to exploit your ignorance, and plenty of people have bet the farm based on bad information or an incomplete understanding of the facts — and lost. However, with the right asset diversification, information, and education, you can learn how to weather those risks and end up on the other side profitable. In fact, Arielle O’Shea’s article “5 Essential Investing Moves for Millennials” published via Forbes lists “say hello to risk” as its second move. “Risk is kind of like that friend who regularly cancels plans but always comes through in a pinch,” she writes. “There might be heartache in the day-to-day, but in the long run, you’ll be glad you stuck it out.”
5. It’s OK to Invest With Your Head AND Your Heart
Millennials simply think about personal finance differently. Writing for LendKey, Dave Rathmanner mentions that Millennials are characterized by a desire to make ethical financial decisions–not just profitable ones.
“In a recent survey on ethical investing, over 85 percent of millennials said that they were interested in engaging in this type of investing,” he writes, referring to the latest, annual U.S. Trust Insights on Wealth and Worth Survey. “That means that millennials would rather prioritize investing in companies that do good and are socially responsible than those that focus solely on creating the largest return for investors.”
Wall Street is beginning to cater to this trend in a bid to court more Millennial investors. Stick to your moral guns, and remember: a bed made of silk and gold is worthless if you can’t sleep at night.
These are the top five rules for Millennial investors, but they’re definitely not the only ones. If you think we forgot something or have an interesting tip to add yourself, mention it in the comments below.
Andrew Heikkila is a Millennial (whatever that means), a writer, an artist and musician, and a small business owner. He believes in the power of change and the power of people. By combining those two elements, he believes, anything is possible. Follow Andy on Twitter @AndyO_TheHammer