Investing for Millennials

Written by Jessie Serrano
Reviewed by Natalie Slagle, CFP®

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When thinking about things like stocks, bonds, funds, and indices, it can be overwhelming with all of the information that is out there in the world. Sometimes it’s easier to break it down into its simplest parts – and then dive into the good stuff. 

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Today we’re going to guide you in your investing journey.  Yes, there is a lot to know.  This blog is jam-packed with just a sliver of it.  Don’t worry, as a novice, you don’t need to know everything.  However, we do think you should know some things.  

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Therefore, we will first discuss some basic definitions like stocks, bonds, and market exchanges and indexes. After the basics are defined, we talk about how a millennial should invest their money.  Finally, we will discuss where a millennial can invest their money.

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Let’s do this!

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INVESTMENT TERMS EVERY MILLENNIAL SHOULD KNOW

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When someone tells you to buy a stock, do you know what you are actually buying?  What’s the difference between an exchange-traded fund and a mutual fund?  Below we break down common words you’ll see when it comes to what a millennial can invest their money in.

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• Stock –  A stock is a security that represents ownership in a company. The owner of the stock becomes entitled to a portion of the company’s assets and profits depending on how much stock they own. 
  
  
• Bond – A bond is a loan made by an investor to a borrower and is used by companies to finance projects and operations. Bond owners are considered debt holders of the issuer.
  
  
• Exchange-Traded Fund – An exchange-traded fund (ETF) is a portfolio of assets that track a specific sector, region, or market. ETFs offer diversification and are traded publicly on exchanges just like stocks at any point in the trading day.
  
  
• Mutual Funds – Mutual funds are made up of a pool of money that is used to invest in stocks, bonds, or other assets. The investments are made into a diversified portfolio and are professionally managed. Mutual funds are only traded once per day as opposed to n ETF.
  
  
• Commodities – A commodity is an investment in raw materials (ex. gold and silver) or agricultural products (ex. wheat).  Commodities can provide protection against inflation since their asset prices tend to rise with inflation. 
  
  
• Alternatives – An alternative investment includes private equity, hedge funds, art and antiques, and real estate. These investments do not fall into the same traditional investments as stocks and bonds and are less frequently traded.
  
  
• Real Estate – By definition, real estate is an investment in land or permanent structures.  Investors have a variety of ways to invest in real estate.  You can buy real estate directly such as a home purchase, rental property, or land purchase.  If an investor does not want to purchase real estate directly, they can invest in a real estate investment trust (REIT) which offers indirect real estate exposure.
  
  
• Crypto Assets – Crypto assets are digital assets that can be purchased or sold by an investor using a public ledger   There are more than 20,000 cryptocurrencies.  The most common cryptocurrencies are Bitcoin, Ethereum, and Tether.

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What are stock exchanges?

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If you turn on an investment news channel, you may hear them reference different exchanges you’ll find that stocks trade on.  Some of the most well-known stock exchanges include the New York Stock Exchange and NASDAQ. 

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Here is some basic information to know about both: 

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• New York Stock Exchange (NYSE) – The New York Stock Exchange is the largest stock exchange in the world (by market capitalization) located in New York City.  All trading in equities is done on one trading floor and another floor is used for the NYSE American options exchange.

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• NASDAQ – The NASDAQ exchange consists of stocks primarily in the technology sector.

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What are indexes? 

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Indexes are a good way to make sure your investments are diversified. They are designed to be a basket of securities to reflect areas of the stock market. Indexes like the S&P 500 replicate a broad market with multiple underlying stocks.  Other indexes like the Dow Jones and NASDAQ are more specialized or have fewer stocks. 

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Here is some more information about these indexes:

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• S&P 500 – The Standard & Poor’s 500 Index (S&P 500) is an index consisting of 500 of the largest publicly traded companies in the U.S. (measured by market capitalization), The index is considered to be one of the best ways to show America’s overall equity performance.

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• Dow Jones Industrial Average – The Dow Jones Industrial Average (DJIA) is an index composed of 30 “blue-chip” companies.  The companies are selected by members of the Wall Street Journal and S&P Global. These companies are large, well-known, and established. It is one of the most-watched stock market indexes in the world.

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• NASDAQ Composite Index – The NASDAQ Composite Index includes over 3,700 stocks listed on the Nasdaq stock exchange. It is weighted based on market capitalization and is heavily weighted toward the technology sector. It’s different from the S&P 500 Index and the Dow Jones Industrial Average because it includes companies headquartered abroad. 

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HOW SHOULD A MILLENNIAL INVEST THEIR MONEY

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There are three themes we want millennials to focus on when it comes to investing.  Diversification, time horizon, and making regular contributions.   We describe each in detail below.

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Diversification

• Diversification is limiting exposure to a single investment or asset.
• When implementing diversification in your investment plan, consider investing in industries, sectors, regions, and/or financial instruments.

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Time Horizon

• Your time horizon is the time between now and when an event will occur. It's important to establish a time horizon with your investments because it will help you assess how much risk and capital preservation is necessary for that goal.
• For example, your child is 10 and therefore you have 8 years to invest/save to help fund their college education goals.  
• If you’re a millennial (born between 1981-1986), you likely have two or more decades to invest your dollars for retirement.  Therefore, having a long-term time horizon with an adequate investment strategy is essential.

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Investing Regularly

• Investing regularly is one of the most powerful tools to your investment plan, and the best way to do this is through a process called dollar-cost averaging (DCA).
• DCA allows investors to fund the same dollar amount on a regular basis and therefore purchase investments are various prices using their consistent dollar contribution.
• The most common form of DCA are employer retirement plan contributions through your payroll.

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WHERE CAN YOU INVEST

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Retirement planning is an essential part of financial planning for your future. There are many different retirement accounts you could utilize depending on yourself or your employer. The main ones we will focus on are individual retirement accounts (IRAs), Roth IRAs, and 401(k)s. Many people are familiar with these accounts, but knowing the key details of each account will provide you with a better understanding of your finances. If you have a different type of retirement (like a SEP IRA, SIMPLE IRA, or Deferred Compensation Plan) you may have different options than what we will list below. We're happy to discuss those with you in more detail as they relate to your situation!

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Individual Retirement Account (IRA)

• An IRA works as a savings account for retirement and includes tax advantages. It is used to invest in many financial products like stocks, bonds, ETFs, and mutual funds. Since the account is designed for long-term retirement savings, if the account holder withdraws from the account before they are 59½, they will receive a tax penalty of 10% of the amount they withdrew. Some exceptions to this tax penalty would be withdrawals for education expenses and first-time home purchases. Anyone earning income can open and contribute to an IRA, even if they have other retirement accounts like a 401(k). One thing to consider is that there is a limitation on the combined total a person could contribute to the account in a single year. 

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• A maximum contribution to an IRA is $6,000 per year for most account holders. The contribution increases to $7,000 per year for account holders 50 or older to give them a catch-up contribution. Contributions to these accounts are completely tax deductible if you don’t have a retirement plan at work: meaning, if you earn a salary of $100,000 and contribute the maximum to the account ($6,000), then your taxable income for the year would become $94,000. If you have a retirement plan at work like a 401(k) or 403(b), then your modified adjusted gross income will determine how much of your contributions are deductible.  

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• Traditional IRAs are mainly recommended for people who will contribute to this account while further deep in their working years. This could benefit you if you are in a higher tax bracket now than what you expect you will be when you retire. Since a traditional IRA is a tax-deferred account, your contributions are tax-deductible now but will be taxed at your ordinary income tax when you retire. 

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Roth IRA 

• A Roth IRA works similarly to a traditional IRA, except for how it is taxed. The maximum contribution to a Roth IRA account is the same as a traditional IRA, however, the contributions are not tax-deductible. It works so the amount you contribute now is taxable, so when you withdraw the money in retirement, it is tax-free! Roth IRAs are recommended when you believe you are in a lower tax bracket than you expect to be when you retire. You could take advantage of a lower tax bracket now and pay less in taxes later.

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401(k) and 403(b)

• A 401(k) plan is another retirement savings plan usually offered by your employer and has tax advantages. When owning a 401(k) plan, you agree to have a percentage of your paycheck contribute to this account and your employer could match all or part of your contributions. 401(k) plans are offered as traditional and Roth. A traditional 401(k) plan functions exactly the same as a traditional IRA.
• Contributions are pre-tax and reduce taxable income, but are subject to taxation when withdrawn in retirement. A Roth 401(k) also is the same as a Roth IRA since it is included in your taxable income now, and is tax-free in retirement.  
• The contribution amount for this account $20,500 per year (plus another $6,500 for those 50 and up)

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• A 403(b) plan is a similar employer-offered retirement plan but is designed for employees of public schools and other tax-exempt organizations.
• Similar to a 401(k), 403(b) plans also are funded through payroll deductions and have the same maximum contribution limit of $20,500 per year.
• 403(b) plans also offer both traditional and Roth contributions.
• One advantage having access to a 403(b) plan is that you may be able to make additional contributions up to $3,000 a year with a maximum lifetime limit of $15,000 if you have had 15+ years of service with a qualifying nonprofit or government agency.
• 401(k) and 403(b) plans are both subjected to a 10% penalty if money is withdrawn before the plan holder is before the age of 59½.

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Brokerage accounts

• A brokerage account also referred to as a taxable account, allows an individual to invest dollars into an account that can be used both pre-and-post retirement.
• The taxation is different for these accounts compared to your retirement plan options.
• The contributions into this account are typically made with after-tax dollars.
• You will pay either long term or short term capital gains/losses within a brokerage account depending on your original purchase price of your investment and the market value on the day you sell your investment.
• A long-term capital gain is considered to be the profit from an investment sold after more than one year of ownership.
• A short-term capital gain is a profit from an investment sold after one year or less of ownership.
• The tax rate for a long-term capital gain could be 15% or lower.
• A short-term capital gain is taxed the same as the ordinary income tax bracket you're in, which could be up to 37%.
• The tax rate for these capital gains is important to consider when liquidating the value of any capital asset.

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There you have it!  No need to look at anyone else for an overview on investing :)  As we mentioned in the beginning, it can be overwhelming knowing where to start.  The most important thing though is just that – to start.  

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Schedule a free consultation with us if you have any questions or want a second opinion on your investment strategy.

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Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.