A short guide to investing for millennials
Investments, pensions, stocks and shares. Probably not the centre of discussion among groups of 17 to 37 year-olds more worried about housing costs and flat wages. However, with inflation eroding cash savings and time being of the essence, it’s never too early to invest for the future.
Born between 1980 and 2000? Chances are that you’re feeling the pinch. From rising housing costs to flat wages, so-called 'millennials' are routinely cited as the first generation to be worse off than their parents.
But is the real picture as gloomy as it seems? The last of Generation Y is about to enter the workforce, while those born at the start of the generation are now well into their career. On top of those earnings, asset-rich baby-boomers are predicted to pass on an astonishing $41 trillion to their children over the next 40 years, according to the World Economic Forum.
So what will Generation Y do with all that money? Putting it on deposit in the bank is one option. Yet cash deposits at the bank are currently eroding in real value because inflation is running ahead of interest rates. The bank may be paying you 1% or 2% interest on your hard-earned savings, but if the cost of living is rising by 3%, then your savings are not keeping up.
Everybody should have some cash set aside for a rainy day or an emergency, but once that’s covered there’s an alternative to cash savings: and that’s investing.
Investing can appear daunting to those starting out, but understanding the key principles can make choosing a stocks and shares ISA, an investment account or a self-invested personal pension (SIPP) easier.
Investing always involves an element of risk
The value of your investments is not predictable or stable. Prices of shares, bonds and other assets fluctuate all the time and so there is always a chance that you may not get back what you put in. However, there’s a lot any investor can do to manage risk, and understanding your own risk tolerance is important when you set out in investing.
Investing is a long game
Keeping faith in the markets over the long term is usually the key to getting a return on your money. History has shown that equities, in particular, generally outperform cash over the long haul, so it makes sense to commit to your investment choices for at least five years. This may seem like a lifetime, particularly when you’re trying to save for immediate goals like a house deposit or a dream holiday, so it’s vital to nail down exactly what you’re investing for.
Investing revolves around goals
What kind of return are you aiming for, and how long have you got? The more time you have to invest, the more ambitious you can be in your investment goals. You can afford to take more risk over longer timeframes (such as twenty years) as your investments will be able to ride out the inevitable volatility of markets, get as much of the upside as possible and (hopefully) romp home with a better return. Having said that, the nearer you are towards wanting to withdraw your investment, retirement for example, the more cautious you should become so you minimise the risk of any sudden market movements wiping out your gains.
Get to know asset types and their risk profile
The types of investments you’ll deal with are called asset classes. Examples include shares in companies (also known as equities), bonds and commodities, like gold. On a risk spectrum, cash and government bonds would be closer to the more cautious side, and equities would be towards the riskier end. An investment portfolio will often hold a mix of assets depending on the investor’s risk profile.
There are also risk scales within asset classes themselves. So equities listed on the FTSE 100, Britain’s main stock market, are more likely to be income generating with a track record of dividend payments and performance than the smaller, younger companies listed on the Alternative Investment Market (AIM), for example.
Diversify to spread your risks
You can never pin your hopes on one single investment to give you the returns you need, however promising it may seem. There are just too many variables outside your control. You can spread your risk by picking a number of shares, bonds and other asset classes across a range of sectors, regions and markets.
For example, a slightly more adventurous portfolio for the long run may comprise 70% equities and 30% bonds and cash. Within the 70% equity band, the equities could be spread across UK, European, American and so-called emerging markets (countries like China, India, Brazil and Russia).
This may sound daunting and you don’t know where to start, but most investments providers will do the ‘diversification’ for you. Just remember to be hands-on with your investments, regularly checking that your portfolio has maintained the right asset mix to keep your goals on track.