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Millennials' Your 5 Common Investing Questions Answered

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Millennial Investing Questions – won’t make you smile like this guy. (photo Getty: Royalty Free)

When I was 22-years-old, I was lucky enough to have two good friends sit me down and get my first investments account opened. I didn’t start with much. I literally invested $25, per month, into mutual fund. My timing seemed to be terrible because I started investing during a big downturn in the market. The performance of the investments was awful and, on top of that, they came with sky-high fees and commissions. The good news was that a savings and investing habit was formed. The point of all of this isn’t about the performance and associated fees of my first investments, but that I got started early and regularly put away money. Years later, I still love investing and have been able to pay it forward by helping hundreds of others get their financial houses in order and, most importantly, keep them that way.

-What is the first step for stock investing? Where do you start? 

There are several places to start. Also, your long-term investing success isn’t determined by your initial investments. The most important thing is that you get started and continue to contribute over time. Pick a mutual fund, or Exchange Traded Fund (ETF) and set up an automatic contribution, monthly. A smart place to start could be a low-cost index fund.

For millennial investors getting started is the most important thing. (photo Getty: Royalty Free)

-If you have enough disposable income to invest a hefty amount into stocks, what is the right amount? What type of stocks – companies – industries? How do you determine that? 

Pay yourself first. Find out what type of retirement plan your company offers. Examples include 401(k), 403(b) and 457 plans. If your employer offers a company match make sure to contribute at least the minimum amount in order to get the full match. It’s like free money. Not getting the full match could easily be a million-dollar retirement mistake for millennials.  You might even get a tax break, since investments that go straight from your paycheck into retirement accounts, like the 401(k), 403(b) and 457 plans, aren’t taxed. Instead, those funds are invested and you are taxed on those investments when you eventually withdraw money from those accounts. If you are just beginning to invest, picking individual stocks will often be too time consuming, and costly. You’ll be better served, and have an easier time, picking a mutual fund or ETF.

-Should millennials with debt still think about making that investment?

There will always be a reason not to invest now. Today, it could be student loans and credit card debt. Down the road it may be a big mortgage or daycare for the kids. I don’t really worry that much about paying off student loans, or car notes, quicker than needed. Credit cards and their astronomically high rates are another issue. Generally, and regardless of debt, make sure to get your company’s match on the 401(k) or whatever type of plan that’s offered to you. Then get serious about avoiding more credit card debt, and paying down debt you’ve already accrued.

Take control of your debt but don’t ignore investing for your future. (photo Getty : Royalty Free)

-We’ve seen quite a few young adults, like those listed in Business Insider’s ’20 under 20 in Finance’ trading at a very young age. When should someone start investing their money into the stock market? 

I always say the best time to start investing is now. It doesn’t matter if you think the market is high or low, or if you are young or old. Get started now and let time and compounding interest work in your favor. I would advise against trying to “time the market” or day trade, which is considered to be much closer to gambling than investing.

You may also enjoy GETTING THE MOST VALUE FROM YOUR EMPLOYEE STOCK OPTIONS: Click here to read. 

-Does the DIY (do-it-yourself) model work for stock investments or is it safer to have a financial planner who manages your portfolio? 

I think the typical person will do much better working with a fiduciary Certified Financial Planner (CFP). The stakes are just too high to risk making a mistake with your investments or financial plan. The richest people I know all work with various financial professionals to help them maximize the benefits of their various accounts. They also don’t let emotions cloud their decisions. Also, money tends to stress out many people and a CFP can take away some of that burden.

In the beginning, you may want to try it on your own. If picking a few funds in your 401(k) account you may be able to get by. Once those account values become larger, you really should seek professional guidance.  You also want to make sure you are on track for your various financial goals, and have saved enough money for your current age.

You can’t control the market, tax rates or inflation. What you can control is how much you save, when you get started and how you handle curveballs as they arise. Things like a recession or the bursting of the tech bubble are just two, out of many, potential curveballs. Remember to simply set it up, and leave it alone. Chasing returns is a fool’s journey. Good investing is often slow and boring, which may explain why so many people hate to do it.

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Boost Your Investing Returns By Lowering Your Investment Costs

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Doctors can increase the health of their portfolio by monitoring investment costsGetty

Limiting your investment-related fees and expenses is a critical aspect of investing. In my work at The White Coat Investor helping doctors, attorneys and similar high income professionals develop financial literacy,  I have repeatedly seen that most investors are paying far too much in investing expenses. Reducing these is one of the most reliable ways to boost your return without taking on any additional risk. Unlike many things in life, in investing you get (to keep) what you don’t pay for.

Reducing investment expenses could potentially allow you to retire years earlier with far more money. Consider two investors, one of whom is paying 2% of the portfolio each year in investment related expenses and 1% of the portfolio in taxes (3% total) to an investor paying 0.1% in expenses and 0.4% in taxes (0.5% total). If we assume they both invest $50,000 per year for 30 years and earn 8% before fees, how much less will the investor with the high expenses retire with? A quick calculation shows that she will end up with 37% less ($5.6 million vs $3.5 million.) As the investor moves into her retirement years, those high expenses continue to limit the amount she can spend from the portfolio and make it far more likely that she will run out of money.

It is critical that an investor examine each of these five categories of expenses and minimize them wherever possible.

# 1 Advisory/Management Fees

Perhaps the largest category of expenses are those paid for financial advice and investment management services. Many in the industry consider 1% to be a standard level of fees. However, on a multi-million dollar portfolio, 1% can add up to $20,000, $50,000 or more each year for the exact same work the investor used to pay $5,000 for. When paying an advisor an Asset Under Management (AUM) fee, it is critical to do the math each year by multiplying the portfolio size by the fee.

Since there are many high quality advisors willing to provide these services for $1,000 to $10,000 per year, it seems silly to pay $50,000. A better arrangement (for the investor at least) is to pay either a flat annual fee for investment management and/or an hourly rate for financial planning. Although your fees will still likely add up to a four figure amount each year, at least they will not be a five figure amount.

Recognizing the importance of costs, some interested investors have decided to educate themselves about investing. With time, the necessary knowledge and discipline is relatively easy to obtain, but the potential do-it-yourself investor should be cautioned that they would be much better off paying a fair price for good advice than doing it poorly themselves. Of course, there are hybrid solutions that can reduce fees dramatically. These include enlisting the aid of a financial planner with the initial development and implementation of a plan and then maintaining it yourself. One could also meet with an hourly rate advisor periodically for a second opinion and a sounding board on any changes to their plan.

# 2 Mutual Fund Expense Ratios

Another significant fee for most investors are the expenses associated with running the mutual funds they invest in. Yet again the industry seems to believe that 1% is the industry standard. However, using low-cost index funds from providers such as Vanguard, Fidelity, iShares, and Charles Schwab you can relatively easily reduce that cost to less than 0.1% per year. Every dollar saved is a dollar that remains in your portfolio working for you.

Some beginning investors might wonder if paying cut-rate prices gives them cut-rate returns. However, time and time again it has been demonstrated that over the long run low-cost index funds outperform the vast majority of their actively-managed peers. In fact, having low costs is one of the best predictors of future returns of mutual funds. It certainly works better than looking at past returns, the method most investors use. It isn’t that the managers are stupid. On the contrary, the issue is that they are all so smart that they make the market efficient enough that the game of trying to beat it is no longer worth playing. They can add value, but not enough to overcome the cost of playing, especially once taxes are taken into consideration.

# 3 Commissions

Investing-related commissions are an interesting expense to consider. These can be completely eliminated by a do-it-yourself mutual fund investor who buys funds directly from the fund provider. However, many investors are paying huge amounts in commissions. This is often a result of mistaking a commissioned salesman for a fiduciary, fee-only financial advisor. While they think they are being given unbiased investing advice, they are actually being sold high-expense mutual funds and insurance products such as annuities and whole life insurance by a broker operating under the suitability standard rather than the fiduciary standard. At times these salesmen may obscure the fact that they are charging commissions by calling them “loads” or even telling the investor that the insurance company is paying that cost, not you. Of course, all expenses are ultimately paid by the investor.

Even a do-it-yourself investor may be running up the commission bill. A commission may be charged each time an individual stock or ETF is bought or sold, even inside a qualified retirement plan like a 401(k). Even at a rock-bottom price of five dollars per transaction, if you’re doing 20 transactions a month it adds up to $1,200 per year. While you don’t necessarily want the expense tail to wag the investment dog, every little bit helps keep costs down and returns up.

# 4 Turnover-Related Costs

Wise mutual fund investors always look at the turnover percentage when selecting a fund. Embedded in that percentage are some hidden expenses paid by the fund but may not be included in the expense ratio. Costs include commissions paid by the fund and bid-ask spreads that allow the market-maker to cover her own expenses and profits. A broadly-diversified index fund may have a percentage less than 10% (meaning less than 10% of the stocks in the fund are bought or sold each year) while an actively managed mutual fund may see a turnover percentage of 200% or more. A long-term, buy-and-hold investing philosophy on the part of the fund and the investor helps keep these costs down. A speculating day-trader is continually whittling down the nest egg with each transaction.

# 5 Taxes

Taxes are another major expense borne by the investor. Although this expense helps pay for government rather than the financial services industry, it lowers the investor’s return all the same. There are many techniques for lowering these costs, and a good advisor or do-it-yourself investor should be familiar with most of them. Investing in tax-advantaged accounts such as 401(k)s, Roth IRAs, Health Savings Accounts, and 529 College Savings Accounts makes a big difference. So does limiting turnover by lowering capital gains taxes due, particularly short term capital gains taxes. More advanced techniques include tax loss harvesting, tax gain harvesting, using appreciated shares for charitable donations, use of municipal bonds when bonds are held in a non-qualified account, and appropriate tax location of asset classes.

Lowering your investment related expenses are a sure-fire way to boost your returns, hasten your retirement and allow for a more comfortable retirement without taking on additional risk. Do all you can to reduce your advisory fees, mutual fund expenses, commissions, turnover-related costs and taxes.

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How millennials are changing the way the we invest

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By Jean Chatzky

When you think about making an impact with your money, what comes to mind?

There are always philanthropic efforts you can support, but what about investing your money in a way that makes a social or environmental impact, while also making you a profit? Often called “ESG investing” (environmental, social and governance), “SRI” (socially responsible investing), “CSR investing” (corporate social responsibility) or simply “impact investing,” the concept has been around for years, but millennials are charting new territory when it comes to doing good with their money.

Today, 43 percent of millennials are more likely to consider making impact investments versus only a third of Generation Xers and a quarter of Boomers. When those surveyed were asked what’s more important — making money or making an impact — the majority of all investors (67 percent) said they would prioritize having an impact. “They aren’t saying, ‘I’m willing to lose money,’ but they are saying, ‘Even if I have to get a slightly lower return, I’m okay with that to improve social issues and company governance,’” says Lule Demmissie, managing director of investment at TD Ameritrade.

The Global Impact Investing Network reported that nearly $140 billion was invested in impact investment strategies, up from just $10.6 billion in 2014 — a staggering increase.

Except that, they often don’t. Impact investments have outperformed the benchmark for eight out of the last 10 years, according to the MSCI ESG Leaders Index. During the same period, impact investments also showed they were better protected from the downside in the market. That’s why even people who aren’t so passionate about saving the world may want to get on the bandwagon (and why the bandwagon is turning into quite the parade.) In May, the Global Impact Investing Network reported that nearly $140 billion was invested in impact investment strategies, up from just $10.6 billion in 2014 — a staggering increase. Additionally, impact investment network Toniic reports that its members now have $2.8 billion total in impact investments, up more than $1 billion since 2016.

“As the industry continues to grow and mature, we believe that over time, there will be no ‘impact’ investing — it will simply be investing,” says Michael Tiedemann, CEO/CIO of Tiedemann Advisors.

Human Rights Is Leading The Way

So, where are people putting their money? Human rights was the most popular cause category for investors, followed by the environment and diversity, according to the survey. Millennials favored environmental impact and human rights, women tended to opt for gender equality, while men leaned toward diversity. Nearly half of millennials — 47 percent — felt so strongly about impact investing they said they would move their brokerage account to gain broader access to socially responsible investments.

Of course these conscious choices aren’t just impacting portfolios — publicly traded companies are starting to realize that it’s good for their business to give a more critical look at which suppliers they’re using, or how much of an environmental impact their operations may make. “In some cases, companies are changing their behavior, and you can give investors the credit for the rapid momentum of those changes,” Demmissie says.

July 20, 201701:05

A Contributing Factor in the Disappearance of Straws

Companies seeking to ensure long-term success may need to take a hard look at some of their policies, says Jordan Farris, Head of ETF Product Development at investment services firm Nuveen. “Starbucks is a good example of a company adjusting its business model,” he says. “As concern regarding the increase in ocean plastic has grown, Starbucks has made the decision to eliminate single-use plastic straws by 2020.”

For investors looking to ensure their money supports the “best” companies, Farris cautions that the definition of what makes a company responsible can vary widely. Overall, it’s any company that is incorporating “positive environmental, social and governance practices into its core business model,” he says. But investors can also have an impact simply by choosing not to invest in companies that are involved in major controversies, that pollute, or that manufacture tobacco or firearms, etc.

How Do You Do Well By Doing Good?

Investors looking to do their due diligence on a company before they invest need look no further than the internet, explains Nick Kovacevich, CEO of KushCo Holdings, the parent company of several cannabis industry firms. “Information is so ever-present today, and it’s not difficult for someone to do 30 minutes of research on a company and come to a determination if they are socially and environmentally conscious.”

If millennials have proven nothing else over the last decade, it’s that they’re willing to push boundaries, even when — perhaps especially when — it means a break with convention, and that’s exactly what we’re seeing with impact investing, Tiedemann explains. “They’re questioning the traditional view of making investments to create wealth, and then once they’ve made money, donating it to their charity of choice.” They’ve decided they want to get the double investment benefit of a social and a financial return, and they’re demanding that the marketplace provide it.

And while it may be the millennials leading this charge now, they’re really just the thin end of the wedge, Kovacevich says. “Millennials are going to teach their children the same ethics and values that they have,” he says, and the impact investment train is only going to build momentum as it chugs along. Tomorrow’s companies will either choose to hop aboard, or find themselves left at the station.

With Kathryn Tuggle

HOW TO SAVE MORE MONEY

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Investing in Education, Self Storage in China

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  1. Investing in Education, Self Storage in China  Bloomberg
  2. Full coverage



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