This post may contain affiliate links, allowing us to earn a commission on the products we would recommend to our families and closest friends. You can find more info on our Legal Stuff page.
Did you know that only 33% of millennials are investing in the stock market?
Or that only 34% of millennials are investing in real estate?
Why are so many millennials not investing? If you’re shouting “student loans!” or “high housing costs!” at me, well…you’re partly right. But that’s not the full story.
A 2017 independent market survey found that 61% of adults find the stock market “scary or intimidating”. And a 2017 real estate investment survey reported that 2/3rds of Americans believe real estate investing is “just too hard, too costly and too far out of their expertise”.
That’s a real bummer because we are missing out on HUGE wealth-building opportunities thanks to these fears. How huge? Don’t worry, that’s coming. But first let’s ask where is this fear coming from?
Why are We Afraid to Invest?
The senior members of our generation (*reluctantly raising my hand*) were young adults when the Great Recession hit. We were nursing fledgling careers, trying to establish our working selves while companies were laying off left and right.
No joke: my husband went through not just 1 or 2, but 3 (3!) studio closures in his early video game design career.
The middle-aged members of our generation (not middle-aged, but you know, those in our generation who graduated between like 2008 and 2012) racked up a bunch of student loan debt only to graduate during the recession and find that no one was hiring. Or that companies who were hiring gave all the “entry level” jobs to the applicants with way more experience.
And if you’re on the young side of our generation, you probably still felt the effects. Maybe your parents were stressed about the economy or lost their jobs. Maybe you had a tough time finding a high school job because those jobs that traditionally go to high-schoolers were going to more experienced workers who had lost their jobs.
And even though most of us didn’t own real estate, it was impossible to avoid the apocalyptic news about the housing bubble burst. Property values plummeted, so many people owed far more on their houses than their houses were worth. Nearly 4 million homes were foreclosed during each year of the recession (meaning the banks repossessed the properties from the homeowners who couldn’t repay the mortgage loan).
Imagine buying a house for $630,000 in 2006 and selling it for $395,000 in 2012 to avoid foreclosure (those are real numbers for a property in Woodland Hills, CA).
And most of us millennials didn’t have much (anything?) invested in the stock market back then. But again, you couldn’t escape the news about the financial collapse of the entire friggin world. Some investors literally lost millions in the market through the recession.
The whole thing was a mess.
Seriously, it’s amazing that we’re not hiding money under our mattresses like the Great-Depression-era kids!
Why We Need to Get Over Our Fear of Investing
So, considering that catastrophe, why would anyone want to invest in the stock market or in real estate?!
You may not believe it after reading all that doom-and-gloom, but real estate and the stock market are both still solid investments.
Consider the big-picture performance
The Great Recession lasted a few miserable years. In the grand scheme of your adult life of investing, it’s a blip. A crappy blip, but still, life goes on and the markets recover.
From 2000-2016, real estate has produced annual returns of 10.71% on average.
For those of us who don’t speak Investor, what exactly does that mean?
I don’t want to bog you down in the technicalities of indexes and averages calculations (at least not in this post!). So in super-simplified terms, this means that if you invested in real estate in 2000, your investment probably grew 10.71% each year on average.
Of course real estate performance varies by local market and returns vary by year, but these are national average results. And these include the decline during the Great Recession years. So even with the Recession factored in, you’re still making bank!
And how about the stock market?
From 1973 through 2016, the S&P 500 indicates that the stock market has produced annual returns of 11.69% on average.
The point is, despite the recession, investing is an empirically smart move!
Consider the cost of not investing
So you can keep your savings safe and sound in a plain ol’ savings account earning 1.5% interest.
Or you can invest. Just for those of us who are natural worriers, let’s pretend investments won’t do as well as they have historically. Let’s say you only earn 7% on your investments. How does that compare to a lifetime of keeping money in your savings account?
Check out this chart. It shows how $100 per week grows in a 1.5% return savings account compared to a 7% investment account.
In each case you save $156,000 total ($100/week for 40 years), but the investment makes you a millionaire, while the savings account leaves you with less than $300,000.
You can’t afford to be too afraid to invest!
What to Do When You’re too Afraid to Invest
So, how can we move forward when we’re afraid to invest? Here are some tips for making it happen!
First, before you invest, make sure you have a fully-funded emergency savings. Sometimes you get all your money tied up in investments and you don’t have any money easily available to cover an emergency. So you want to set aside cash for emergencies before you start investing.
Then start investing! I invest in 2 separate types of accounts: 1) a retirement account (what kind of retirement account should I use?), and 2) a general investment account where I grow money to accomplish my dreams. I call it my Dream Fund 🙂
Ok, on to those tips:
1. Remember your Why
Why are you investing? I mean, sure, to grow your wealth. But why bother growing your wealth?
So you can retire while you’re young enough to enjoy it? So you don’t have to spend your whole life stressing about money? Or maybe you want to buy a house, start a business, fund a non-profit, travel the world, or send your kids to college.
There are tons of reasons to grow your wealth through smart investments. What’s your Why (or Why’s, plural!)?
2. Start investing in small increments
Moving thousands of dollars from your checking account to an investment account is scary (if you’re fortunate enough to even have thousands to transfer!). Instead of forcing yourself into a big, terrifying move, start small.
Open an investment account, and set up auto-transfers to move a small percentage of each paycheck from your checking to your investment account each payday. I would recommend starting with something like 3-5% of your paycheck and increasing that number over time.
Your annual financial check-up is the perfect time to revisit your investment percentages.
3. Build a “Diversified Portfolio”
Want to sound like a fancy investor? Throw the phrase “diversifying my portfolio” into a conversation.
It sounds smart, but it’s actually a really simple concept. Diversifying your portfolio just means you’re not putting all your eggs in one basket. You’re investing in several different things so that you’ll have a cushion if one of your investments tanks.
Want to learn a trick to automatically diversify your portfolio?
Never buy individual stocks! Don’t buy Facebook stock. Or Amazon stock. Or stock in Netflix, Google, or any other company.
Why not? Because if you invest in only one company and that company’s stock nose-dives, you’re SOL.
Chipotle is a perfect example of this. Stock prices were soaring at over $700 per share in 2015, then bam! E Coli hit, and the stock price unexpectedly drowned. By Oct 2017, it was under $300 per share. And it’s never come close to recovering.
No one could have predicted this giant fall, and it serves to show that individual stocks are just too risky.
What to Do Instead
Instead of investing in individual stocks, invest in Index Funds. You can do this through your retirement account and through your general investment account.
Index funds are like sampler baskets of a bunch of different stocks. When you buy a share of an index fund, you’re actually buying pieces of shares of dozens, or even hundreds, of different companies. So if one of those companies tanks, you still have many others to buoy your investment.
Index funds = automatic diversification!
As long as you’re investing in index funds, your money will rise and fall with the stock market as a whole instead of with these volatile individual stocks.
Notice, I said “rise and fall“. The market will dip. That’s part of the ride. But over the long-term, your money will grow by investing in the stock market through index funds.
Btw, you can diversify even more by investing in multiple index funds. Some are set up for bonds instead of stocks (which are great as you get older – more on that in a bit). Some focus on foreign stocks. And some even focus specifically on tech stocks. You can actually find Index Funds that include Facebook, Amazon, Netflix, and Google.
Want to diversify even further? Save some of your investment dollars to buy real estate at some point!
4. Pick your investments
“But there are so many index funds. What if I pick the wrong ones?”
I hear that a lot!
Here’s the thing. Choosing almost any index fund will put you in a better position than not choosing one. The beauty of index funds is that they cover a large cross-section of the market, so as the market goes up, they go up.
The one category to avoid is Index Funds specializing in metals and minerals. Those have been sucking over the last 5-10 years.
Of course I recommend you do some homework and talk to a professional about which funds are best for you. My personal strategy when I’m lost in a sea of index funds is to go with an inexpensive S&P500 index fund. Btw, the expenses are paid out of your investment account and are almost always covered by your market gains, so you don’t have to pay these out of pocket.
You just want to make sure you have enough for the initial investment (some are only $100 to start, and some are $3,000).
5. Ride out the inevitable downturns
What should you do if the market suddenly drops? Nothing. Or maybe invest a little more if you have money available. The one thing you should not do is freak and sell off your investments.
Humans are weird when it comes to investments. When the stock market is high, everyone wants in, so they pay inflated rates for stocks. And when the market falls, people panic and sell their stocks because they’re afraid stock prices will continue falling. Don’t do that!
If you want to be super-involved in your investments, think of market dips as a sale! You can suddenly get a share for $180 when it was $200 yesterday. Hooray!
And if you don’t want to be super-involved, there’s nothing wrong with completely ignoring market ups and downs. Continue investing a little bit every payday whether the market is bear or bull, and you’ll come out well-ahead!
6. Get more conservative as you near retirement
Now, as you get closer to retirement, you might not have time to ride out the market downturns. So you want to move your investment money into investments that focus more on protecting your wealth than growing it.
That’s when bond-based index funds will be ideal for you. Bonds are known to be safer than stocks. They just don’t grow your money as much or as fast. But do you see why that’s good as you get older? Your money will have already grown because you invested in riskier stocks when you were young. So when you’re older, you want to take less risk because you don’t need that aggressive growth. You just want to play it safe with the nest egg you’ve built at that point.
The fancy term for this is “asset mix”. Here are some sample asset mixes depending on how risky you want to be.
If you’re still a little freaked about investing, it’s ok! Lots of people are afraid to invest. But that fear is statistically irrational. Sure the market will dip from time to time, but if you stick with your investments through the downturns, your millionaire future self with thank you!
Comments (4)