Millennials need to invest — and they need to do it now.
There are many benefits to investing early and often, but unfortunately too many millennials are sitting on the sidelines because they worry about the risk of suffering a repeat of the Great Recession of 2008.
If you feel this way, you may just need to take some time to learn more about what's involved with investing. Millennials need to know why it's important to get off the sidelines and in the game, and they need to know how to avoid excessive risks while taking advantage of potential returns.
Here's what every millennial should know before dipping a toe into the markets.
Know how to deal with the fear of investing. The most common thing I hear from my clients who hesitate to invest is that they're simply afraid. They don't necessarily fear investing — but they do fear losing money. Unless you're independently wealthy or have a long-lost rich uncle who will swoop in and leave you his millions, investing is a critical act. It will be nearly impossible to simply save enough money to fund your lifestyle in the future.
All investments come with risk. But letting your money sit in cash presents a risk of its own, and that is the risk of losing purchasing power due to inflation. Inflation averages a little less than 3% a year, and the best savings accounts rates run a little over 2% right now. Let your cash sit in those savings accounts, and it will be worth less in the future than it is right now.
Understand the power of compounding. No matter what you do with your money, you'll likely face some amount of risk of loss. That shouldn't stop you from using smart strategies to invest wisely so you can minimize risk while still earning enough of a return to meet your goals.
In fact, you should do everything you can to get started and get in as early as possible. Why? Because you can't speed up compounding.
Compounding returns are the driving force that makes investing so powerful, especially when you're young and you have time on your side. The longer you let your money ride out the ups and downs of the market, the more likely you are to have a positive outcome.
If you wait to invest, you will find yourself forced to chase higher returns in order to have enough money to meet your goals. That puts you at more risk because you're trying to get a bigger return.
Time is on your side right now, so take full advantage of that and don't wait to get started.
Know what you can control. When it comes to investing, you can't control exactly what the market does or the precise rate of return you earn — but you can control how much you save, what percentage of your income you allocate to long-term investments and how you invest those funds.
Don't obsess over getting the "best" rate of return possible because that is outside of your sphere of influence. Instead, focus on what you can control. That includes:
Know how much of your portfolio should be in equities. When you invest, you need to know how to split your portfolio up between equity and fixed income, or stocks versus bonds. To figure that out, you need to know more than just how you feel about investing.
That's what most "risk tolerance" questionnaires determine: How comfortable are you with taking on risk?
That's important, because part of managing your money successfully is managing your emotions well at the same time. If you can't handle risk, you're going to panic the first time you experience a market drop with a portfolio allocated to 90% stocks.
But that doesn't go far enough. You also need to know when you need the money. If you're investing so you can retire in 30 years, you have more capacity for risk than if you're investing to generate enough cash to buy a house in 10 years.
Keep in mind that investing for the long term is more likely to provide you with a better outcome than just trying to make a bunch of money in the next few years. The stock market is a volatile place — but over time, it tends to trend upward and provide positive returns.
Know where to put your money when you actually start. Mutual funds and exchange-traded funds are a good place to start because rather than picking individual stocks in various sectors and countries, you can buy into investment vehicles that track indexes.
When you invest in mutual funds or ETF, you immediately invest in thousands of companies rather than just trying to pick one stock. That offers immediate diversification and can also be lower cost.
Companies such as Vanguard, Fidelity and others offer very simple, easy access to such funds. Specifically, target date funds might be a good place if you've never invested before. The name of the fund corresponds with the date you hope to retire, and the fund will automatically adjust over time to move from taking on more risk to less as you get closer to the date when you'll need the money.
The bottom line for millennials is this: The best time to get started investing is right now.
— By Eric Roberge, founder and financial planner at Beyond Your Hammock
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.