I used to be intimidated by the thought of investing in stocks and bonds. I also thought that the only way to do it was to pick individual stocks or hire a professional to purchase mutual funds for you. Of course, neither is true.
Investing itself can be as complicated or as simple as you want it to be. Modern technology has made it so that anyone can purchase and manage their own investments easily and efficiently.
A recent study by Stash showed that 79% of millennials aren’t investing at all and 69% find investing confusing. The overlap is clear. A main reason millennials aren’t investing is that it seems too complicated.
Are you skeptical about being able to start investing by yourself?
On a scale of 1 to 10, how complicated do you think opening a bank account is?
On a scale of 1 to 10, how complicated do you think investing is?
Whatever difficulty you rated opening a bank account, it would only be a point or so higher to open an investment account through a robo-advisor (the simplest way to do it), due to having to answer a few extra questions. But is doesn’t have to be if you understand the basics.
As I educated myself about personal finance and specifically about investing, I conquered my own investment fears and started taking control. I found some simple, essential truths about investing that everyone should know.
Truth 1: The market trend is always up in the long-term
The stock market is truly a wild ride. However, it’s also one that has consistently gone up for the past hundred years. The following chart shows this general upward trend.
This chart also shows how often the market also goes down, which shows the importance of investing for the long-term. The longer time horizon you have, the more likely your money will see significant growth.
Below are the average annualized S&P 500 market returns in the U.S.:
- 50-year return: 9.69%
- 10-year return: 7.15%
- 5-year return: 13.68%
- 1-year return: 9.5%
This is the first thing you absolutely need to know: in the long-term, you can count on stock investments to go up. In the short-term, you can expect stocks to go up and down many, many times. If you need money for the short-term, this isn’t where you want to put it.
Truth 2: You can’t time the market
There are very, very few people that have a proven record of getting returns that are better than those of the stock market overall. It’s been shown again and again that you can’t time the market.
Those that try to time the market not only can miss out on market gains and dividends and end up having to buy at higher prices, but also incur trading fees.
Fortunately, what this means is that you can and you should simply put your money in and let it ride the ups and downs. Ignore the hype of the news, coworkers and friendly stranger at the coffee shop that thinks they know when/what/how to win big in the stock market. Remember that you’re investing for the long-term (truth #1).
Dollar cost averaging is a great way to consistently putting money into the market, while spreading your money across multiple times of likely ups and downs. This is essentially what you’re doing when you contribute regularly to a retirement account each payday.
Truth 3: Asset allocation and diversification are key
Because of the swings in the market, to reduce your risk of losing your hard-earned money in the market, it’s essential to diversify across multiple types of investments. There are various types of diversification:
- Diversifying among types of investments such as cash, stocks, bonds, businesses and real estate.
- Diversifying among different industries in the stock market, such as manufacturing, healthcare or financial services.
- Diversifying among international and domestic stocks.
- Diversifying among accounts with different tax treatment including taxable accounts, tax-deferred accounts, and tax-free accounts.
This is where not putting all of your eggs in the same basket comes in. A properly diversified portfolio will make your overall investment portfolio less volatile. That means it’s the best bet that your money will be there when you need it (in the long-term of course!).
Truth 4: You can lose everything in the market, unlike keeping cash
If you aren’t currently invested in the market, this is the truth that is likely scaring you off because you’re worried about risk of loss. Putting all of your cash in a bank account will essentially ensure that your money will be safe from loss, at least up to FDIC insurance levels.
Alternately, purchasing individual stocks could mean you end up losing it all if the company declares bankruptcy or goes out of business. That’s why diversification is so important (truth #3). You may temporarily lose a lot of money by investing in a broad range of stocks, but the market will come back eventually.
However, you have to remember truth #1 is that the market trend is always upward in the long-term. Knowing this should calm your fears. The market will go down many, many times but will also go up. That leads us to our next truth.
Truth 5: Low-cost index funds are your best option
It’s been proven that the best way for the average person to invest in the market is to simply invest in low-cost index funds such as those offered by Vanguard, Fidelity or Schwab. An example of a popular index fund is the Vanguard Total Stock Market Index (VTSAX) that invests in a broad range of U.S. companies of all different sizes.
We talked about how the overall trend of the stock market is up. That guarantee certainly can’t be applied to individual stocks or even specific industries. An index fund is the way to go!
Index funds ensure property diversification, can have extremely low fees and are simple to purchase. There are essentially no downsides for a new investor.
After feeling overwhelmed by the thought of choosing, managing and monitoring my investments, I chose to set up an account with Wealthfront, a robo-advisor. They asked me several questions about my risk tolerance and goals and then suggested an account allocation of stocks and bonds. I selected a few options, set up automatic investments from my bank account and literally haven’t done anything since (like I literally haven’t even checked my account in at least a month because it’s been so busy yet still added to my investments during that time!).
So, millennials, it’s time to get out there and start investing. If you have a bank account, you can get started investing. You can hire a financial advisor, use a robo-advisor (such as Wealthfront) or purchase and manage them yourself. But, you can’t afford to miss out on the potential long-term returns for your future.
If you want to learn more about investing, here are some additional resources:
- The Bogleheads Guide to Investing
- The Four Pillars of Investing
- J.L. Collins’ stock series (start with just parts 1-5 if you’re brand new to investing)