Investment Options That Can Help Millennials Shed Risk Aversion

Zacks - finance.yahoo.com Posted 5 years ago
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The United States Census Bureau expects Millennials — people born in the years between 1980 and 2000 — to make up America’s largest population cohort by 2019. The so-called ‘selfie’ generation, despite being fairly driven and competitive, is in fact quite conservative when it comes to investments. About 50% of millennials are burdened by student loan debt and are primarily investing in safer options including bonds, money market instruments, mutual funds, etc.

Most millennials now park their savings into 401(k)s and IRAs, which are essentially tax-advantaged retirement savings instruments. While there’s nothing wrong with investing in a 401(k), especially when a portion of your contribution is matched by the employer, the plan offers investments in mostly low-risk, low return options like mutual funds, bonds and other similar instruments. While an IRA account might enable you to invest in other financial instruments like stocks, the maximum contribution limit is just about $5,500 a year. Further, both options attract penalties on withdrawals before retirement.

Is concentrating too much on retirement savings and taking the low-risk-low-return path right for millennials when they can pump their money into more rewarding investment options?

Isn’t it Risky to be Risk Averse Now?

Having witnessed the market collapse during the 2008 financial crisis, millennials’ risk tolerance levels are low. In fact, survey results from Bankrate.com reveal that around 33% of millennials view cash as king and find it difficult to part with.

However, not taking enough risks during this phase of their life when they have time on their side could also be a potential mistake. While millennials are doing a good job by saving in traditional ways, many are playing it quite safe with their investment strategies, keeping their money out of high-return investment options that could ensure a much brighter future and self-supporting retirement.

Equity Investing for Higher Returns

Equity investing is surely not for the faint hearted. However, long-term investments in quality stocks could be a great way to build wealth. With millennials inclined toward the health and wellness, entertainment, and technology industries, strong brand names in these respective markets with growth potential would make for best bets.

This is also in line with Warren Buffett’s philosophy of investing in those businesses which one understands. Buffett is considered by many to be one of the greatest investors ever. The man always places his investment dollars only in businesses that he fully comprehends and it actually makes a lot sense. If you don’t understand the business, it becomes difficult to predict its future performance and understand its potential. Further, value investing and holding on to your stock for a long time is a more prudent strategy than just trading for short term gains.

Be it the FAANG stocks — Facebook FB, Apple AAPL, Amazon AMZN, Netflix NFLX, and Alphabet GOOGL — or companies like The Walt Disney Company DIS and NIKE, Inc. NKE, millennials should find good bets for long-term capital appreciation.

Real Estate Investing: The Red-Hot Option

If you think property investing is only for the old and rich, you may be missing out on an extremely lucrative investment vehicle with solid cash flows, high returns and the ownership of a tangible asset. While about half of the millennial population is skeptical about real estate investing, it does ensure an early and a more financially secure retirement as well.

While for some, this may not be quite a feasible option considering heavy student loan debt, others should not miss the opportunity. It’s certainly worth buying your first home after saving for the down payment versus paying the rents and making the landlord rich.

If you already own a home, consider saving up for another down payment, buying a second house, renting it out, and becoming the owner, getting monthly checks without the hassles. You might start simple and small but do your research thoroughly. Choose the right property and consider your cash flows.

Hedge Your Bets with ETFs

Considering many millennials’ unadventurous approach to investing, a portion of an individual’s portfolio invested in exchange traded funds will help mitigate losses in case markets crash and can also provide diversification. Vanguard Health Care ETF VHT, First Trust NASDAQ Smartphone ETF FONE, iShares U.S. Technology ETF IYW, and Invesco Dynamic Software ETF PSJ are some popular ETFs worth investors’ attention.

Bask in Gold’s Glow

The addition of gold to your portfolio is another great way to solidify your financial future. Owing to its countercyclical relationship with the stock market, this precious metal can provide cushion against market volatility and act as a hedge against inflation. Though it may not be a highly rewarding investment, a small portion of your portfolio invested in gold is certainly a wise option to diversify your holdings. Also, while many other precious metals, which may be in vogue in a given period, may lose their intrinsic value with time, gold has actually stood the test of time, making it a reliable option.

Bottom Line

An individual’s risk tolerance, social responsibility, desire and time horizon determine their investment decisions. However, risk taking can be rather healthy for the younger generation considering the time advantage that they have.

Millennials should not be hesitant to tap into more lucrative investment options like stocks and real estate, while also keeping in mind the important aspect of diversification of one’s portfolio.

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