OMG! – Investment Mistakes of Millennials
I think millennials get a bad rap. The two stories I hear in the financial press are that millennials spend too much on lattes and avocado toast to save for retirement, and those who are saving are too scared to invest. There is probably some truth to both perceptions, but recent studies from Oppenheimer, Wells Fargo, and Transamerica indicate that millennials may be smarter than we thought…in some ways.
First some good news about millennials:
A handful of studies over the past year show that nearly three-quarters of millennials are now saving for retirement. They started saving at an earlier age than previous generations and half of those who are saving (mostly through 401ks) are putting away 6% of their income or more. The other encouraging news is they are starting to buy homes again. Only 1 in 10 millennials (who are out of school) are still living with their parents, and the homeownership rate finally increased in 2017 after falling for several years.
Investing is not our jam:
The main problem for millennials (as a group) may be that they do not know how to invest. According to the same surveys, many millennials are frightened or confused by investing and are inclined to leave their savings in cash or very conservative investments. That began to change in the last year as millennials began to ratchet up their risk tolerance after witnessing several years of good market performance.
Learning how to invest by trial and error:
Let’s face it; most people learn how to invest by trial and error. Sadly, I was no exception. I remember in high school (mid-1980s) I bought a penny stock because a stockbroker told me that a “travel company” had just gotten the phone number 1-800-GET-FREE. That seemed like a good enough reason for me to invest. Suffice it to say, that company, and my investment, no longer exist.
Another time I bought the stock TCBY because I liked its yogurt and a Value Line report (from 6 months prior) said this stock was “timely.” I only lost 20% on that one. I like to say, “I made my mistakes young.”
You invested in what???
This week, I was reminded of my own early investing mistakes as I read an article in The New York Times about lessons millennial investors are learning from the recent downturn.
One 26-year-old was saying she didn’t think she would invest again in the stock market for a while after her investments dropped 65% in one week. Say what? The only way that happens is if you have concentrated positions in the most speculative, momentum stocks. I’ll go out on a limb and say…that’s a bad idea.
Most investors should be investing in mutual funds and ETFs instead of individual stocks, in my humble opinion. If you invest in individual stocks, I recommend limiting your exposure to any one company to 5% (or preferably less) of your overall portfolio. You need a diversified basket of stocks, not one or two.
Another millennial was stunned when he found that his cryptocurrency account was down 40%. I’ll go out on a limb again and say…cryptocurrency is not a prudent investment; it is a speculative gamble, appropriate for very few investors. Did you read my bitcoin article?
I was also a little surprised to learn that millennials are expecting average annual returns from their investment portfolios of 13.7% according to a 2017 survey by AMG, an asset management company. Umm…I like the optimism, but those returns over long periods of time are highly unlikely.
What is realistic for our millennial investors (and everyone else)?
A portfolio of 100% US stocks had an average annual return of around 10.1% between 1926 and 2015. A portfolio of 100% US bonds returned roughly half that (5.4%). To put that into perspective, if you invested $1 at a 10.1% return and waited 40 years, it would turn into $47. You’d have just $8.20 at a 5.4% return, or if you played it safe and kept the money in the bank at 1%, you would have $1.49 after 40 years. This ignores inflation, which would make the “real” return on money in the bank negative in terms of purchasing power. (See: Average Returns for your portfolio.)
Want to learn how to be a prudent investor? You can go the trial-and-error route (not recommended) or save yourself some time and money by learning from others. Check out some of my best investing articles. (I’m patting myself on the back now.)
Have a great week.
P.S. our fearless Chief Investment Officer, Robert Luna, was on Bloomberg radio last week talking about where the opportunities are in today’s market. You can hear the clip HERE. After the initial intro, fast forward to about the 29:00 mark. Robert’s segment lasts for about 6 minutes.
P.P.S. Happy Valentine’s Day. I’m sending my love to you and your families (through the computer).