4 Things Millennials Can Learn About Investing From Previous Generations
Sometimes, money matters can feel frustrating as a millennial. Learning something new can make you scratch your head, wondering where to start. Investing is no exception.
One advantage millennials have is the ability to learn from previous generations. Additionally, there is one arena where millennials may have it better than previous generations, and that’s the arena of investing.
Currently, there are many accessible, transparent options for investing that are both low-cost and don’t require a huge amount of money to get started.
If you’re wondering “how do I learn to invest my money?”, you could start by taking a peek into history to learn what was different, what was the same, and what you can do better.
Here are four things that millennials can learn about investing from previous generations.
1. The Impact of Fees and Taxes
Fees (and taxes) can have a significant impact on an investment. Millennials could use this information to minimize fees and maximize investment returns. This type of transparency wasn’t always available to previous generations who didn’t have the all-knowing internet.
It is now widely understood that just as investment returns compound (rise exponentially) over time, so do fees. While a 1% fee may seem like nothing on paper, it could result in thousands or even hundreds of thousands of dollars in fees paid over the course of an investing lifetime, depending on the amount invested. By minimizing investment fees, amounts paid into fees could hypothetically be kept in the pocket of the investor.
2. The Importance of Diversification
One advantage of being a millennial is wider access to education about investing, including online access to investor stories from both the near and distant past. Most everyone has heard at least a few horror stories about investors losing it all in a big bet.
Two recent such examples are investors who lost money investing in the tech bubble of the early 2000s and in real estate during the crash of 2008 . As is the case with almost every crash, there are not only stories of people losing money, but losing all of their money.
Through these horror stories, millennials are able to derive an important lesson about learning how to invest money: Diversify your investment assets. A crash can happen to any investment; that’s the nature of investing.
For every reward, there must be a parallel risk. To mitigate some of this risk, investors have the option of spreading their investment dollars across different asset and sub-asset classes. This way, no one bad investment will take down an entire livelihood.
It is easier than ever to access a variety of investments types at a low cost. There are also a growing number of investments that are already (at least partially) diversified, such as funds that hold many different types of securities, for example, a retirement target date fund.
3. The Pension vs. the 401(k)
There is a major difference in the way many millennials will fund retirement compared to the way many of their parents or grandparents funded retirement—who does the funding.
Previous generations often had pension plans. The company they worked for would save and invest money for retirement on their behalf. In retirement, the worker would receive a pension check, cut by the company, once a month. The company was responsible for everything, including the saving, investing, and disbursement of retirement money.
While some millennials may have pension plans through their workplaces, it is more likely that they have a 401(k), a SIMPLE IRA, or a 403(b). Each of these is set up through an employer, but the employee has the responsibility of funding the account.
Many employers may contribute to the plan as a benefit to the employee, but the employee bears the risk of the investment performance and is responsible for deciding how to manage disbursing the funds in retirement.
Many millennials have more responsibility for their own retirements than previous generations. Therefore, young people might want to learn how to invest money for their futures, save diligently, and take advantage of their employer sponsored retirement plan.
4. The Prevalence of Investing Options
Index mutual funds, exchange-traded funds (ETFs), and other low-cost investing options are fairly new. As recently as the 1960s and 1970s, the only stock market options that investors had access to were individual stocks and managed mutual funds.
Because these options were high cost, they were not particularly friendly to small investors and many people were shut out from the opportunity of investing.
Millennials, on the other hand, have so many available options that it can almost feel overwhelming. Low-cost and diversified investment options are available at many brokerage firms, through 401(k) plans, and through investment services like SoFi Invest®.
SoFi Invest goes the extra mile by providing two distinct services depending on the investor’s preferred style of investing. For investors who would like to “set it and forget it” in a low-cost, diversified ETF strategy, SoFi Automated Investing may be the right fit.
Investors who want a more hands-on approach could check out SoFi Active Investing, where buying and selling stocks and ETFs comes at no additional cost to the investor. That’s right—buy and sell stocks and other funds without a transaction fee. That’s a pretty revolutionary way to invest—no matter what generation an investor fits into.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .