New research from investment management firm BlackRock suggests that Millennials are fearful of the stock market and sitting on too much cash in their accounts. It got me thinking – do Millennials fear the stock market? Or are there other factors at work?
Millennials came of age during the global financial crisis and Bernie Madoff Ponzi scheme era. They watched their parents lose half their retirement savings in just a few short months between 2008 and 2009.
Related: A conversation about Gen Y money
But sitting on cash may not signal a fear of the stock market. On the contrary; it might be a prudent move, depending on their financial goals.
I started investing when I was 19 years old. The TFSA didn’t exist back then and so I decided to put small amounts into my RRSP every paycheque, thinking I was wisely getting ahead.
It turned out that wasn’t such a smart move, after all. Why? Because I was saving for a goal that was at least four decades away. Meanwhile I didn’t bother to prepare a plan for the short-to-medium term future. You know, like how to pay off my student loans and credit card debt faster, where to find money to save for a wedding, house down payment, and maybe a new car.
Investing for retirement should have been the least of my concerns back then, and sure enough, I ended up raiding my RRSP to pay off my debts and get my financial life back in order.
Related: The worst financial advice ever given to Millennials
If I could do it all over again today (and tax free savings accounts existed) I would stash my cash inside a TFSA – likely in a high interest savings account – and use the money to fund my short-term goals. Does that mean I fear the stock market? Hell no! But where you place your cash should be determined by when you need the money. If that time frame is anywhere between 0-5 years, the stock market is not the place to park your savings.
So perhaps Millennials are holding cash and avoiding the stock market for other reasons. Whether they’re burdened with student loan debt, or saving up to buy a home in an expensive city like Vancouver or Toronto, or just trying to get on the right financial footing, you could argue that it makes better sense to hold cash for the short-term rather than stocks and mutual funds for the long term.
Don’t get me wrong; investing for retirement is important, and the earlier you get started, the more compound interest can work to your advantage. But options like a TFSA makes it easier to save for short-term goals so that young savers don’t have to get ahead of themselves like I did, only to dip into their retirement funds later when they need the money.
Related: An easy, yet sophisticated way to invest
The other factor could be that Millennials are shunning the traditional banking and investment model that has been riddled with high fees, conflicts of interest, and stodgy face-to-face, pen-to-paper practices that should be obsolete by now.
Millennials have grown up banking online and should embrace the robo-advisor model where they can open and account on their smart-phone in five minutes and start investing. That, combined with an independent fee-only financial planner should get Millennials excited about investing and building a healthy financial future…eventually.
Your twenties are exciting years, full of big changes and all kinds of opportunities – finishing university or college, starting a full-time job, seeing a regular paycheque for the first time. Maybe you’re moving into your own place. Or, perhaps you’ve been working for a while and you’re ready to start setting some financial goals.
If you start making the right financial decisions now, you’ll get a head start on the road to prosperity. The most important thing to remember is time is on your side – you just need a bit of discipline. To build a strong and stable future you need to lay the foundation now.
Live within your means
Managing your finances for the first time can seem overwhelming. You discover that the cost of living is expensive what with daily expenses, rent payments, food and entertainment. You might have a professional wardrobe to purchase. You likely have student loans and one or more credit cards with outstanding balances.
Saving for an incredibly distant retirement may not even be on your radar.
This is the age where you want to impress – treating your friends to dinner and drinks, inviting your buds to watch the game on your new 84” TV, driving a flashy sports car. You risk overspending on discretionary items and under saving for big-ticket purchases.
The major key to financial planning is to live within your means. Create a budget and keep track of your spending. See if you find any areas of overspending where you can cut back.
Start getting good value for your money. Evaluate every purchase and make sure what you buy is worth the expense.
Invest in yourself
These days you can’t rely on receiving a steady paycheque every two weeks for thirty years, even in the most prestigious and well-paying professions. According to statistics, the average worker can now hold 10 different jobs between the ages of 18 and 36.
Instead, financial stability now comes from cultivating multiple sources of income, becoming more visible through networking, and developing marketable skills.
Hone your negotiating skills for your job interviews and practice asking for more money even if it feels awkward. Women especially often tend to take the first sum offered. Future raises are based on that initial conversation and can make a big difference over the course of your working lifetime.
When negotiating your salary don’t forget to consider benefits. Pensions and matching programs and various insurance benefits automatically increase the value of your salary package.
Avoid the debt trap
Many young adults get their first credit card as a student. Financial institutions make it easy to get credit and minimum payments are low. It doesn’t take long before your spending can spiral out of control. A typical university graduate carries a balance on one or more cards. Don’t get used to credit and running up consumer debt. It’s easy to live beyond your means. Be smart.
Your first step is to make a plan to tackle your debts logically. Pay your bills on time to avoid late fees and increased interest charges. If you can’t pay off your credit card balance every month, stop using it altogether.
Even student loans should be paid off as quickly as possible. Aim to have them paid within five to seven years.
Your ability to handle credit in your twenties can have a lifetime impact. You need to build up your credit history and earn a good credit score. Bad spending habits now can affect your future ability to get a car loan, mortgage, or even a job.
A credit card is pretty much essential since you need one to book a hotel room, rent a car, or buy things online. Compare cards to find the best deal for you. There’s no point in choosing a rewards card if you are carrying a large balance, choose a low interest rate card instead.
Savings: Start slow and start small
To be able to find money to save and invest within your tight budget may seem like an arduous task when earnings are low and needs are immediate, but young adults who don’t save are missing out on the powerful effects of compounding.
First make inroads into your debts and then set up a savings plan. Aim to build up a least one month’s worth of living expenses. Save for lump sum expenses throughout the year.
Make savings automatic whether your goal is short term or long term. We have a habit of underestimating small amounts. Even $50 a month will add up quickly.
Some employers offer RRSP or pension plans that automatically take the contribution right off your paycheque. Consider taking advantage of these plans if they are available, especially if there is any kind of matching done by your employer.
Become financially aware
Educate yourself about investing and financial products.
Do some research into your credit cards and bank accounts to see what fees you are paying and whether there are better options for you.
Protect yourself and your stuff. Look at disability insurance – at least workplace coverage, if available. Compare auto and home (or tenant’s) insurance rates and coverage. Don’t underinsure just to try and save some money.
What kind of investor are you? Aggressive? Risk-averse? Investing sites at many discount brokerages have online practice accounts where you can practice investing. You might start with mutual funds, ETFs or try your hand at stock picking to see what works for you. How well do you handle losing money? It’s better to find out now when your investing amounts are small and you have plenty of time to recover from any inevitable mistakes.
Books on finance for beginners:
- The Wealthy Barber, David Chilton. This is one of the biggest selling and popular financial planning books ever, now available in a new, updated edition.
- How Not to Move Back in with your Parents, Rob Carrick
- Stop Over-Thinking Your Money, Preet Banerjee
- Millionaire Teacher, Andrew Hallan
- Wealthing Like Rabbits, Robert R. Brown
Financial take away for your twenties: Manage your debt.
I get plenty of questions about my two-ETF retirement portfolio. Some advisors think it’s too simple – stating that a properly diversified portfolio should contain at least six asset classes. Further to that, some clients and blog readers ask me whether it’s wise to add a dash of gold, REITs, or even farmland to their portfolios – usually after reading doom-and-gloom advice from the likes of Peter Schiff or Jeff Rubin.
My two-ETF solution, which is made up of Vanguard’s VCN and VXC, is about as diversified as it gets when it comes to global equities. VCN holds 231 large-, mid- and small-cap Canadian stocks, while VXC holds 5,150 stocks from across the globe in developed and emerging markets outside of Canada.
Related: Why investors should embrace simple solutions
I’ll concede that an all-equity portfolio is not appropriate for most investors. My portfolio is missing a bond ETF, which is included in the popular three-ETF model portfolio listed on the Canadian Couch Potato blog.
I chose two equity ETFs for a few reasons:
- Stocks have outperformed every asset class over the very long term.
- I trust myself not to panic when stocks are tumbling.
- I treat my defined benefit pension and my online business as the fixed-income portion of my retirement – meaning I can take more risk with my portfolio.
So most investors should add the bond ETF, and that still makes a nice and simple three ETF solution, which is all an investor needs for a long-term retirement portfolio.
In the latest edition of MoneySense, Dan Bortolotti asked why, even though the Couch Potato portfolio is cheap, easy to manage, and proven to perform, do investors still want to tinker with it?
Related: Why I simplified my investment portfolio
Dan gets similar questions from his readers, saying things like:
“I like your Couch Potato portfolio, but I would like to make some changes. What do you think about adding some gold, small-cap stocks, commodities, real estate, global bonds, sector ETFs, infrastructure and maybe some blue-chip stocks to the mix?”
Bortolotti is only slightly exaggerating but says when it comes to investing many people seem bent on making their portfolios needlessly complicated.
Mebane Faber’s new book, Global Asset Allocation, dispels the notion that the secret to investing is about finding the optimal portfolio mix. He looked at seven popular portfolios, including the Permanent Portfolio, the Endowment Portfolio, and the All Season Portfolio, and compared their historical returns to a traditional balanced portfolio made up of 60 percent stocks and 40 percent bonds.
Which strategy won? All of them performed similarly well – the inflation-adjusted annual returns ranged from 4.12 percent to 5.67 percent.
The key takeaway: as long as you get the big decisions right by keeping your costs low, broadly diversifying your portfolio, and sticking with your strategy for the long term, you’re going to be fine. The endless tinkering, optimizing, and searching for an edge will more than likely lead to higher costs and poor behaviour – which will result in worse returns.
Related: How behavioural biases kept me from becoming an indexer
So that’s why I’m sticking to my super-simple two-ETF solution. It has all the diversification I need with close to 5,500 stocks from around the world. The fees are extremely low; VCN has a MER of 0.06 percent while VXC has a MER of just 0.23 percent.
I’ve got the basics down – I’ll beat nine out of 10 investors on fees alone. Is it worth the time and effort to add and rebalance additional asset classes to try to minimize risk or squeeze out an extra percentage point of returns? Not to me. I’d rather get 90 percent of it right and then focus my energy on things that truly matter, such as increasing my savings rate, spending time with family, and growing my side business.