Most millennials (and Americans) are financially illiterate. Sound a bit harsh? It’s true. If you’re a millennial and you’re reading this, ask yourself these simple questions.
- Do I have a goal of how much to save and invest every month?
- Do I have an investment portfolio?
- If you have an investment portfolio, why did you chose that investment strategy?
- Do I understand the risks of your chosen investment strategy?
- Does my investment strategy align with my short term and long term goals?
- Is buying a home an asset or a liability?
Upon becoming the solitary source for financial and investment advice in my circle of friends, the realization came very quickly that most millennials (and Americans in general) don’t have a good understanding of the investment tools at their disposal to build wealth. Most of my friends know they need to be saving money, but they’ve never learned the right way to save and invest. Some of them keep all of their money in a savings account because they’re afraid of the risk of losing money in the stock market, while others are investing in individual stocks they haven’t researched because they heard good things from a family friend. Almost no one I talk to has taken the time to hash out a financial plan for their future.
If this sounds like you, and you’re nervous about investing, it’s not your fault. Our school system doesn’t teach basic financial literacy, so we’re left with millions of Americans who know they should be saving for retirement, but don’t understand the right way to go about it. I graduated from Indiana University, one of the top 10 business schools in the country, and while I learned how to calculate risk premiums and expected returns of stocks in our finance class, we were never taught how to actually apply any of that to invest in our personal lives. If the nation’s top business students aren’t being taught the right way to invest, it comes as no surprise that financial literacy is so rare.
I’ve spent the last two years learning everything I can about investing in the stock market, and for the last year I’ve been learning how to invest in real estate. The rest of this article will give you the tools you need to plan and invest for your retirement. I’ll cover the safest, low risk strategy for millennials that’s easy to follow, and then cover some strategies that require a more active approach but can generate significantly higher returns.
Step 1 — The Mindset Of An Investor
The biggest mistake most investors make when they start out is letting their fear of losing money cause them to lose money. While this sounds counter intuitive, it happens all the time. We’re investing for our future, so we need to take a long term view. The easiest way to lose money is to panic and sell when the market goes down, and then buy back in at a loss when it goes back up. It sounds silly when you read about it, but the first time you watch one of your investments take a dive you’ll understand how powerful the fear of losing more money can motivate you to sell. This phenomena impacts both new investors and millionaires using hedge funds.
If you’re only buying relatively safe investments like the S&P 500 index, you don’t need to worry about short term fluctuations, as you know that your investment is going to appreciate in the long term. The best way to not stress about your investment account, is to view it as a fund that you can’t withdraw from. Once you put money in your investment account, it’s going to stay there for the foreseeable future, working hard to earn you passive income.
Step 2 — Make A Plan
Every investor needs a plan that they can follow. Take a look at your salary and your current expenses, and set a reasonable target for how much you will invest every month. Once you invest this money, view it as money that is only going to be used for investing for the next 20 years at a minimum. Every dollar you invest is a dollar that works around the clock to earn you more income. I view this money as my personal business, working towards my retirement. Every month I need to add funds to this business before I do anything else. This concept of paying yourself first became popular in Robert Kiyosaki’s best selling book, Rich Dad Poor Dad. Every new investor should read it.
Now that you know how much you’re going to invest every month, it’s time to get started. If you’re concerned about not having that much to invest, this Bigger Pockets article about retiring a millionaire on a $30,000 salary will put your mind at ease.
Everyone has different levels of risk that they’re comfortable with, so there isn’t one investment strategy that will work for everyone. The plan I’m going to lay out will work for most millennials who have a long horizon for investing. If you don’t know much about the stock market, you don’t want to even think about picking individual stocks. Almost everyone who tries to pick stocks ends up doing worse than the market as a whole. While there are strategies you can employ that can beat the market, they come with more risks, and you have to be willing to be more of an active investor (the real definition of beating the market is getting a higher return for the same amount of risk, but that’s a topic for another article) You can achieve great returns without a lot of work if you stick to index funds.
Step 3 — Getting Started With A Broker
Before you can buy a stock, you need to find a broker to work with. I recommend that you use RobinHood. Robinhood is a mobile brokerage that has no fees, with no minimums to invest. This means you can invest small amounts at your leisure without having to pay a fee for every trade. Robinhood lacks some of the powerful analysis that other platforms offer, but since we’re only buying indexes, this isn’t important. If you’re only investing small amounts at a time, the $7 fee that most companies charge will destroy your potential returns before you even get started. Robinhood gives you a level playing field to get returns without having to worry about fees.
Step 4 — Making Your First Investment
You’ve created your Robinhood account, and you know how much you’re going to invest — it’s time to get started! In the search bar in Robinhood, type in “SPY”, and click on the “SPDR S&P 500 ETF Trust”. This is a combination of the 500 (actually 505) largest companies put together in one index. Buying one share of SPY means you own a piece of 500 different companies. You don’t have to worry about one company having a bad year and your investment going south. The S&P 500 index is generally considered the best gauge of the US market as a whole.
Every month, invest your target savings goal into SPY, and don’t get discouraged if you see a downturn in the market. Consistency will pay off.
There are hundreds of other index funds you can invest in, but to get started, we can just invest in the S&P 500. As you get more comfortable investing, it’s prudent to invest in more than just the S&P 500 to further spread out your risk. However, getting started now is more important thing you can do. I’ll cover more advanced diversification strategies in another post.
I’m Investing! What Can I Expect?
Congratulations! You just made your first investment. You’ve officially entered the world of investing. Over the long term, you can expect around an 8% return on your investment. That does not mean that your investment will increase by 8% every year. Some years you will see huge gains, and some you will take a substantial loss. The most important thing you can do as an investor is not to sell if the market dives. I’ll say it again — Do not sell if the market tanks! When the market takes a dive, Savvy investors buy more. As Warren Buffet says, “ Be fearful when others are greedy and greedy when others are fearful”. Keep investing the same amount every month, and you will start to see your investment increase with your consistency.
It’s important to note that this strategy is not a smart idea for everyone. Millennials have over 30 years left in their career, so we can afford to take on the risk of a market correction, as we won’t need our investment accounts for the foreseeable future. Anyone who is further along in their career and closer to retirement should be taking an approach with less risk, and not have all of their cash in the stock market.
Bonus Content: Buying A House
Buying a home can be one of the best, or worst investment anyone makes. Buying a home you can’t afford can sink almost all of your income into your mortgage payment and maintenance. There is no guarantee you will be able to even sell your home for more than you paid for it, and even if you can, the 6% realtor fees would still have you selling at a loss. The average home appreciates 2% per year, which is a dismal return when you consider the maintenance and interest costs you pay on your mortgage. I’ll cover the benefits of buying vs renting in another post.
For these reasons many savvy investors (myself included), don’t consider your primary residence as an asset. It’s a liability. That doesn’t mean real estate is a bad investment, you just have to be smart with your approach. If you’re confident that you’re going to live in the same town for at least two years, I would recommend that you look into House Hacking. House Hacking is the term for buying a duplex or a 4plex, and having your other tenants pay for all or most of your mortgage. When you move, you rent out your unit, and the tenants will pay for your entire mortgage, and if you made a smart purchase, you can have positive cash flow every month! First time home buyers can buy a duplex or 4plex for 3.5% down with an FHA loan. I’d also recommend that you use GoldenKey when you buy or sell a home. GoldenKey Gives buyers a 3% commission rebate when they buy a home, and let’s sellers sell their home without paying commission
Finding the right property to house hack takes a lot of work, and I’ll be covering all of the details in another article. I recently closed on my own house hack, and the results are staggering. Instead of paying $700 a month for rent in St. Louis, I’m actually getting paid around $200 a month to live in a home I own. That doesn’t account for the equity I’m receiving every month by my tenants who pay the mortgage. That’s a difference of $900 in cash flow to invest per month, and equity in an asset that I’ll be able to sell for a large return in 5–30 years. That extra $800 will provide an additional $10,000 I wouldn’t have otherwise had to compound wealth every year. House hacking is one the the best financial decisions any millennial can make.
I hope this article has motivated you to take your financial future into your own hands, and get started investing. If you’re interested in learning more, I’ll be posting a lot more on medium and the GoldenKey blog about investing and real estate. Please follow me if this helped you.
In the meantime, here’s a list of books I recommend to get started.
- Rich Dad Poor Dad by Robert Kiyosaki
- The Intelligent Investor by Benjamin Graham
- The Essays of Warren Buffet
- The little book that beats the market by Joel Greenblatt (if you’re interested in more than buying index funds)
- The Bigger Pockets Podcast
- Any of the Bigger Pockets books by Brandon Turner
- www.GoldenKey.com when you buy or sell a home
- The Hard Thing About Hard Things by Ben Horowitz
- Good To Great by Jim Collins
- Zero to One by Peter Thiel
- Choose yourself by James Altucher