Are you saving money every month?
If yes, where does that money go? Into a savings account at the bank or into an investment account like a TFSA, RRSP or trading account?
Do you buy stocks, mutual funds, or ETF’s? Or do you stick with the security of cash, money market funds, or GIC’s? Or are you sitting there reading this wondering what the heck I’m even talking about? There are no wrong answers, but let’s be honest, some yeses are better than others.
Millennials Aren’t Investing
Even though many millennials have started saving for retirement, the proportion of their investments that are sitting in cash is much too high. According to a study completed by BlackRock in 2015, 61% of millennials were saving for retirement, but they held 70% of their portfolio in cash or cash-like (such as a GIC) investments. That’s high, like REALLY high. Cash serves its purposes, but it’s not going to let you retire. Keeping your emergency fund and any other short-term savings needs in high-interest savings at the banks makes perfect sense. That’s about it though. You’re not going to get yourself any closer to retirement if all your money is sitting in cash earning pennies on the dollar.
Millennials have a long-term investment horizon, which means we can take more risk because we’ve got more time for recover any losses. You can absolutely have 100% of your investment accounts invested…in the market…earning you money.
So, what’s the hold-up my friends?
Lack of Cash Flow
If you are struggling to get your bills paid every month, then the last thing you are worried about is what stock to buy next. Many millennials have substantial student loan debt, credit card payments, and high rent to deal with and this doesn’t leave room in the budget to invest. That’s ok; you’ll get there. Focusing on paying off debt and building up an emergency fund should be your focus right now, and there is nothing at all wrong with that. It doesn’t mean you can’t get a head start for when you are ready though. Start looking into the pros and cons of different types of investments or even play around with a mock portfolio.
The Wrong Kind of Education
As a whole, millennials are remarkably well educated. More of us have a college or university degree than any prior generation. Usually post-secondary education results in getting paid more, and while that’s still the case, it also means that many of these graduates are swamped but student loan repayments that result in the lack of cash flow issue we just discussed. The other problem is that we may be the most educated generation, but we’re not learning the practical stuff. When I graduated university, I could write you one hell of a paper on the impact of gender stereotypes during the 1960’s counterculture movement, but I had no idea that credit card debt could affect my desire to buy a house in 10 years.
That’s a problem! Going through 17 years of school (yes, I counted kindergarten) and not learning the basics of managing your finances is unacceptable.
Fear of the One-Eyed, One-Horned, Flyin’ Purple Money Eater (aka the Stock Market)
Who here is scared of the stock market? According to that BlackRock study, 62% of the millennials reading this think that ‘investing is like gambling’ and 42% think that any growth earned isn’t worth the risk.
That is a lot of millennials who are worried more about losing money than they are about growing their money, and that’s the wrong mindset.
I’m not here to scold; I get it. The standard definition of millennials includes those of us born between 1982 and 2002. For many of us, that puts our formative years right smack in the middle of the 2008 financial crisis. We may not have watched our own investments fall off a cliff, but we likely heard horror stories from our parents and were overwhelmed by negative news stories. Growing up under such economic conditions doesn’t exactly leave you with a whole lot of confidence in the stock market.
It’s important (vital) to look at the big picture though. Let’s take a quick look at a short-term and long-term comparison of the Canadian stock market. In this case, I’m using the S&P/TSX Composite Index, which is a common benchmark for how well the Canadian stock market is doing.
First up, a one month, short-term look…
Uh ok, that does look pretty scary. Look at all those ups and down (we call that volatility), why would I ever want to watch my money do that? You’re not wrong, and one big tip of investing is to ‘set it, and forget it’. There’s no need to check in on your investments every single day; you’ll just stress yourself out.
Now, let’s look at what happens when we look at the big picture…
Not quite so scary now hey? If you had your money invested for the past 30 years, then things are looking pretty darn great. There have been some bad times (that big dip in 2008 is very apparent), but overall your money would be worth much more today than it was back in 1985. Of course, this doesn’t mean that you’re guaranteed to earn money if you keep it invested for 30 years. There is ALWAYS risk in the markets, but in my opinion, the risk is worth it.
Time Is On Your Side
The one thing us millennials have working in our favour is our timeframe. Most of us don’t have aspirations of retiring before 40, and that means your investments have time to let the markets work their magic. The longer you have until retirement, the more risk you can take and the easier it is to recover from mistakes. You’re not going to make it through your investing career without losses, but they don’t need to throw you completely off track.
Inflation is the Real Enemy
A common misconception is that all the risk lies with investing your money, but that’s not true. Doing nothing can be just as risky. There’s this little thing called inflation, where a dollar today isn’t worth the same in the future. You know how your parents complain about how the cost of bread just keeps going up? That’s inflation.
The Bank of Canada has the job of trying to keep inflation within the target range of 1% and 3%. They do this by raising or lowering interest rates.
What this means, is that if your money is earning less than 2% (and if it is sitting in a savings account then it almost certainly is), you are losing buying potential. You’re not going to be able to retire if what you save ends up worth less than what you started with. Beating inflation is a must, and you’re not going to accomplish that by leaving your money uninvested.
So what are you waiting for? It’s time to get your money working for you and getting you one step closer to retirement.
How to Get Started
You have a few options when it comes to buying your very first investment. You could go traditional and open up an account at the bank or find yourself a financial advisor. Or, you could be all modern and millennial-ish and go with a robo-advisor. A robo-advisor is exactly as it sounds. It’s an online platform where you can open up a variety of investment accounts (TFSA’s, RRSP’s, trading, accounts, etc.) and an algorithm will choose an investment portfolio for you based on your risk profile. Robo-advisors are simple and cheap, which makes them perfect for beginners.
Here’s a couple of options available for Canadians:
- a portfolio built of ETF’s based on your risk profile, and the option to choose socially responsible investments
- no account minimums
- 0.5% fee for under $100,000 and 0.4% fee for over $100,000
- your first $5,000 is managed for free
- they will cover any transfer fees charged by the institution you are leaving for any transfers of over $5,000
- also build portfolios of index funds and ETF’s based on your risk profile
- flat rate fees are charged based on amount of assets; $20/month for <$75,000, $40/month for $75,000 to $150,000, or $80/month for >$150,000
Before opening up an account with either platform, make sure to read the fine print. There are additional fees (such as MER’s) that aren’t charged by Wealthsimple or Nest Wealth but are charged by the funds you hold. Those are standard across the industry and robo-advisors will still be cheaper, but it’s important to know what’s up.
Let’s discuss this further. Are you an investing millennial? Or are you part of the majority that thinks cash is king? What are your reasons for or against investing?