Millennials aren’t investing and a large part of the reason why is fear. We were just getting started with our careers when all hell broke loose with the stock market in 2008-2009. We saw our parent’s terror as they watched their life savings disappear and house prices plummet. Stocks and real estate are the two largest forms of investment people generally make, and as we watched this all go down, we thought “I’m not going to let that happen to me.”
Fear took over and we checked out of investing. Nearly four in five millennials aren’t investing in the stock market.
Investing Fear and Confusion
As humans, we fear what we don’t understand and investing really is kind of scary when you’re just getting started. You have a lot of questions about which investments accounts you should be using, how the stock market even works, what you’ll do if you lose all your money and what the heck an ETF even is?
Who are you supposed to turn to for answers to all of your questions? Your bank supplied personal advisor, a mutual fund dealer from work, your dad, the internet? Can you even trust any of these people to give you an unbiased opinion?
So many questions!!
First, stop putting pressure on yourself, it takes time to get comfortable investing. No one has it all figured out the second they get started. It takes practice and patience and a whole lot of asking yourself “What the hell am I doing?” before that becomes “Just call me investing goddess”.
Looking Your Fear in the Face
If you don’t hold a single mutual fund, ETF, stock or bond right now, ask yourself why. Is it because you don’t have enough money, you don’t know how to start, you have too much debt? All of these are really common millennial reasons for not starting to invest.
If you do hold any of the above investments, ask yourself why you chose them.
Then keep asking why. You can use this to distill down what is holding you back.
For example, say I own a particular mutual fund. Why? Because my workplace gave me a choice of three mutual funds with one specific company so I could receive my employer RRSP match. Why do I continue to keep it? I didn’t know changing was an option. Why? Because I don’t really understand what a mutual fund is and if/how I can change it. Why? Because it’s easier to keep the one they gave me then figure it out for myself. I’m afraid I’ll choose a worse investment if I switch.
Once you identify your main barrier to investing you can start to work on it slowly.
Actually Getting Started
No one wants their investments to be such a wild ride that they panic, give up and sell when the markets are at all-time lows. There are two ways to decrease the volatility in investing. First is by understanding your risk tolerance and second, through portfolio diversification. So what are they?
Risk tolerance is related to the amount you hold in stocks versus fixed income (bonds, GICs, etc.), so that when there’s a big drop in the market, you won’t panic and sell. The fixed income part of your portfolio will cushion the fall. When you take on more risk your portfolio will go up and down with the market more.
The amount of fixed income you should have conservatively corresponds to your age. I’m in my 20’s so I started with 25% bonds in my portfolio. Over time I learned I was comfortable with more risk, so now I personally hold 10%. I feel comfortable with this number because I have a large emergency fund and I understand I’m investing for the long term. My money has a decades of time in the market to recover from losses and continue to grow.
Risk tolerance is calculated for you by a simple test when you first sign up with an investing company or robo-advisor. You can fudge your answers to get the amount you’re comfortable with or take what they give you.
I really should emphasize the importance of not going higher in fixed income than your age. For example, when I finally convinced my BF to let me look at his investments he had 80% in fixed income. That’s crazy! There’s no need to be so conservative considering he’s 30 years old and will be invested in the market for decades. Unfortunately, he told his advisor he didn’t want to lose money and the advisor didn’t explain the benefits of taking on more risk, especially when you’re young. When he transferred his investments to the robo-advisor Wealthsimple he determined he’s comfortable with 20% in fixed income.
Diversification basically means you want to hold stocks and bonds that don’t correlate with each other. If one goes down, they don’t all go down. You do this by holding several baskets of multiple stocks or bonds, known as mutual funds or ETFs. The least complicated way to do this (using ETFs as an example because they’re very low cost) would be to hold one ETF for each the Canadian market, Canadian bond market, US market and the rest of the world’s market. If you hold 25% in bonds, then the other three would be equally divided with 25% as well. The markets don’t overlap too much and have differing distributions of industries, so they go up and down independently of each other.
This sounds complicated but there are a few ways to make it much easier on yourself, especially if you’re not interested in managing your own money.
Making Life Easier
There are two options I recommend. The first would be going with any one of Tangerine’s low-cost investment funds. You choose the fund that most closely resembles your risk tolerance, i.e. if you decide you want 25% in fixed income, you would choose the Balanced Growth Portfolio. The fees on these portfolios are less than half of regular mutual funds at 1.07% and there are no extra fees if you have a lower balance.
The other option I recommend is a robo-advisor, such as Wealthsimple. I know you’re probably thinking you don’t want a robot managing your money, but hear me out. Robo-advisors ask you a quick questionnaire to gauge your risk tolerance then build you a diversified portfolio of low cost ETFs. Each portfolio tends to hold 10-15 ETFs, which is more complicated than you might need, but it also more than covers your bases. You simply contribute your money and they deal with the rest.
This is a great option due to its low cost, and if you’re just getting started with a lower balance, you’re fees are minimal. They’re transparent so you can see exactly where you money is. They also have socially responsible portfolios so you don’t have to invest in companies with questionable business practices or industries you don’t want to support.
I’m Still Afraid
The last thing I can tell you is to simply start. Delaying investing will only continue to build the fear and you’ll be missing out on years of returns.
So game plan, ease your way into it. Start with $10 a month or $5 a week. A small amount you’re comfortable with. Then open an investing account, like one of the two I mentioned above, and contribute your money monthly/weekly. Then just watch what happens. It’ll go up and down depending on the markets and slowly over time you’ll become more familiar with the process of investing.
There’s no such thing as having too little money to invest.
This starting-small approach is what I’m using right now to become more comfortable investing on my own with ETFs. Even after investing for several years I still find certain aspects of investing intimidating, but over time I’ve found a method that works for me, and if you start slow I think you can too.