Common wisdom says to invest in the stock market while you’re young because investing over the long term reduces your risk and offers more opportunity for your money to multiply. But since when do young people listen to common wisdom?
Research from the Investment Company Institute (ICI) suggests that only one in five investors under 35 (22 percent) are willing to take a “substantial” risk in the stock market. That’s a big change from a decade ago, when they were the age group most likely to throw caution to the wind.
A report of statistics and market analysis from ICI notes that, “In the past decade, households have endured two of the worst bear markets in stocks since the Great Depression.” The implication is that watching their parents lose money in stocks may have frightened away an entire generation of budding investors.
Of course, unemployment isn’t helping – the unemployment rate last month for those under 35 was over 13 percent, 40 percent higher than the national average. Hard to invest when you’re not working.
Whatever the reason, many young people are playing it safe – instead of buying stocks or other riskier-but-potentially-more-rewarding investments, they’re choosing low-risk, low-return options like certificates of deposit (CDs). Of course, that’s the group making investments at all: Many don’t believe they have the excess cash and necessary knowledge to start investing.
But young people can develop the skill-set for risk-based investing and they should. For a compelling reason why, you need look no farther than Stacy’s portfolio. In less than two years, his personal stocks are higher by nearly 50%! That’s not a return you could hope to copy – much of his portfolio was purchased at the depths of a terrible market decline – but it does illustrate why stocks can make a good place for some of your long-term savings.
Definitely check out Stacy’s story What to Know Before You Invest in Stocks.
Here’s some additional advice for young and would-be investors…
- Deal with debt first. If you’re paying 17 percent on a credit card, the first place to “invest” is to wipe out that debt. While stocks have outperformed many other types of investments over time, their long-term average return is around 10 percent. Paying off a 17 percent credit card is like earning 17 percent with no risk – a much wiser choice. Watch Investing vs. Paying Down Debt for more.
- Separate short-term and long-term goals. For most people, saving is different from investing – you save for things you want in the near future, say within a few years. Investing is long-term: money you won’t need for five years or more. For short-term savings, keep your money safe: things like CDs: shop for the best interest on our interest rate search page. For long-term savings, investments with more risk – like stocks – should be a part of the mix.
- Don’t be afraid to start small. A lot of people think you have to be rich to buy stocks. You don’t. In fact, starting soon is much more important than starting big. There’s no law that says you have to buy 100 shares of a stock: you can buy one or two. You can also buy mutual funds and ETFs (exchange-traded funds) in small increments.
- Ask other people what they do. It never hurts to ask, especially if you’re new to investing. Never guess, and definitely don’t invest based on tips or hype. Listen to trusted, experienced investors instead. Start with Stacy: his portfolio is online, and he gives the logic behind the buys and sells he does (his most recent purchase was Corning – read about it here). But talk to anyone around you who’s an experienced investor: get their take and learn from their mistakes.
- See what your employer offers. Many companies have retirement plans you can buy into straight out of your paycheck. This is a good way to save for a few reasons: You aren’t tempted to spend it, the government doesn’t take a slice of it in taxes, and some companies even match what you put in: if your company contributes 50 cents for every dollar you contribute, that’s like earning 50 percent in one day- an offer you can’t refuse.
Finally, whatever the investment, always make sure you understand exactly what you’re putting your money in, how it works, and the potential for both reward and risk. Be brave, but don’t be stupid.