Your 20s and 30s have the potential to be some of the most powerful investing years of your life. With decades of working years ahead of you, the sooner you start investing in your future, the happier and wealthier you’ll be when you’re finally ready to kick back and relax.
And yet, we tend to let a few convenient lies get in the way.
1. I need to buy stocks in individual companies.
One of the pitfalls of newbie investors is their tendency to pick individual stocks, despite the fact that reams of research have demonstrated that investing in individual stocks isn’t a solid strategy.
In a recent analysis of its users’ behavior, Openfolio, a site where investors can privately and publicly share their investment holdings, found that younger investors’ tendency to bet on individual stocks doesn’t pay off in the long run.
Younger millennials (18-25) put nearly 60% of their portfolios in individual stock and 40% in mutual funds, and their returns were a paltry 2.37% in 2014.
Compare that with investors age 25 and older who tended to invest about 50% of their portfolio in mutual funds and the other 50% in individual stocks. That more conservative approach paid off in the form of 6.34% in annual returns in 2014, according to Openfolio.
A better route? Mutual funds and exchange-traded funds give you the ability to spread investments across hundreds of stocks or bonds in a single fund, rather than focusing on a few. And because they don’t require much in the way of management, they are way cheaper on the fee front.
That’s not all they have going for them. A 2013 paper by investment advisor Richard Ferri and Betterment, an online investment platform, found that mutual fund-based portfolios outperformed compared to actively managed portfolios 82% to 90% of the time.
One of the reasons investors do better with mutual funds is that truly effective stock picking requires the kind of superhero discipline and emotional restraint that humans, unfortunately, tend to lack. In an oft-cited 2011 study by the University of California, researchers found that investors who tried to pick stocks underperformed mutual fund investors for several reasons: the first group were too heavily influenced by moves in the market; they lacked diversified portfolios; and they relied too much on past returns when choosing their investments. And index funds in particular -- the ultimate in passive investing that lets you invest in a portfolio that matches or track the components of a market index -- have been shown to outperform actively managed funds. Even professional stock pickers are bad at stock picking.
“[Index funds] weren’t as popular when I was 30 years old,” says Allan Roth, a certified financial advisor in Colorado Springs, Colo. “So in some ways, millennials have a huge advantage over their parents.”
That being said, if you’ve got a healthy nest egg going and you’re trying to fight the urge to place a few bets in the market, no one’s stopping you. Even Roth keeps a small amount of cash on hand that he uses to invest in a couple of stocks each year.
“It’s a small ‘gambling portfolio,’” he says. “It helps scratch that itch but it’s just for fun."
2. I don’t earn enough to start investing yet.
If you’ve got a job, you manage to pay rent each month and you can afford simple luxuries like the occasional dinner out and a full tank of gas, then trust us — you’re earning enough to start investing.
Even if you save 100 bucks a month, that money will be worth way more 40 years from now than if you waited to start investing until your 40s or 50s.
Want proof? The brainiacs from the Center for Retirement Research did the math for you. They found that someone who starts saving at age 45 will need to sock away nearly three times as much as a 25-year-old would in order to retire by age 65 (27% vs. 10%).
For further encouragement, think of yourself 10 to 15 years down the line. It’s only going to get harder to set aside that money when you’ve got kids and a mortgage to deal with.
3. Investing is for professionals and finance majors.
Even if you scratched your head all the way through “Wolf of Wall Street” you can still take a crack at investing on your own.
If you’ve opened up a retirement fund, whether through your employer’s 401(k) plan or an IRA at an outside firm, then congrats: you’re investing! And lucky for you, it’s never been easier to be a lazy investor. Target-date funds have become an increasingly popular hands-off investing vehicle. You pick a fund based on your projected year of retirement and as you age, the fund will adjust your allocations for you. For example, a 25-year-old worker today who plans to retire around the year 2055 might go for the Vanguard Target Retirement 2055 (VFFVX), which invests nearly 90% of portfolios in a mix of U.S. and international stocks and the rest in bonds. As the worker ages, Vanguard would gradually shift more of their funds into fixed income assets.
If you want to take a more hands-on approach, start by checking out your 401(k) or IRA provider’s website. Most will have some kind of tool you can use to come up with your own personally-tailored investment mix, based on your age and risk tolerance. Check out this tool from Vanguard, Fidelity or Bankrate. If you’re going the DIY route, we’d suggest setting up a meeting with a fee-only certified financial advisor. Ask around for referrals or look up one in your area on NAPFA.org.
You probably wouldn’t pull your own teeth without seeing a dentist first, so why not let a professional help you figure out how to build your nest egg?
Have a burning personal finance question? Check out Ask Yahoo Finance and email us at YFmoneymailbag@yahoo.com.
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