The Millennial Way Forward

If nothing changed about your current retirement plan, would you be able to easily support yourself and your loved ones come age 65? For many of my fellow millennials this is a sobering question. On the one hand, it is hard to think and plan four decades ahead. We are still young — scraping our way to better careers and salaries — so our focus is not on our twilight years, but on the here and now. On the other hand, we are cautious and worried about money because we have come of age during a rotten economy, and have watched the housing and stock markets crash, bringing financial ruin to those we love.

We are a generation obsessed with self-improvement. Most wake up in the morning and think, how can I improve my lot in life? Very few are just satisfied. Self-improvement is hard work, but luckily improving one’s personal financial situation is straightforward. It is one of the easiest ways to get better right away. The cruel irony is that we work tirelessly in our 20’s and 30’s to improve our careers and ourselves, but then spend so little time thinking about how to put our money and success to good use.

So far, a nice chunk of the millennial population has done something about long term financial planning: 43% of millennials have a 401(k) and 23% have an IRA. That is a good start, but it’s not enough. So how can millennials get started? The key is an education on the basics of money, personal finance, and investing.

Reaching millennials is tough because fully one quarter of them “trust no one” on money matters. Still, a large percentage — about one third — say that they trust their parents for advice on money. By laying some basic groundwork — either on their own or with encouragement from their parents — millennials can get off on the right foot and set themselves up for success.

The easiest way to understand the power of starting young is to focus on is the potential of every single one of your dollars.

The Potential of Each Dollar

What can every invested dollar grow to by the time you retire? The answer varies greatly depending on where and when you invest.

Those millennials that have saved and invested are very conservative with their money — opting for cash over stocks. The aforementioned stock market and housing crashes have been imprinted on our brains, and made us wary of “risky” investments like stocks. Because of our biological wiring, we are about twice as sensitive to losses as we are to gains. Once burned, twice shy as the saying goes — and we’ve been burned several times.

This biological imperative to be extra-sensitive to danger works great in a primitive, survival setting, but it wreaks havoc on our investments. Human nature compels us to sell after market crashes and buy at market peaks, even though we are supposed to be doing the opposite. These emotional reactions are very short-term in nature: our emotions make us avoid immediate dangers and pursue immediate opportunities.

The remedy is to redefine risk as a long-term rather than short-term concept. Here are four key lessons about the potency of your dollars.

The potential of every dollar fades quickly with time. If you start investing younger, you will harness the most important variable in the investing equation: time in the market. $1 invested in the stock market at age 25 has typically grown to $15 by retirement. The same dollar invested at age 40 has typically grown to $5 by retirement. Read that again. Dollars have typically had three times the potential when invested at age 25 versus age 40. Warren Buffett wasn’t a billionaire until he was sixty years old. He started investing when he was eleven. Step one, start young.

The potential of every dollar is maximized by spending long periods in the global stock market rather than in cash or bonds. If your time horizon is long enough — which it is if you are a millennial — then stocks have always trumped the alternatives. Millennials have built cash-heavy portfolios thus far, so consider the same potential of each dollar kept in cash (savings accounts, CDs). The average result for $1 invested at age 25 is growth to $1.20—a paltry return compared to the $15 from stocksWe think of bonds as the next safest option after cash, but the average $1 invested in bonds at age 25 has grown to $2.7. The long-term historical record is clear: stocks win out. Step two, if you are young, focus your portfolio in the stock market. Stocks are dangerous in the short term, but we are young so the short term is irrelevant.

The potential of every dollar fades the more often you check your portfolio. You are supposed to buy low and sell high. Most do the opposite. Human nature is great for many things, but investing is not one of them. The less you look at your results, the fewer chances you’ll have to screw yourself up. Step three, ignore short-term fluctuations in markets.

The potential of every dollar will be maximized if you make your investing automatic. Default options are powerful because we are lazy. If you automatically deposit a percentage of your income into your investment accounts (401(k), IRA, brokerage account), then you’ll build wealth without effort. Step four, automate contributions to your investing accounts.

The Way Forward

If you just invest a little bit of time and planning early in your life, you can effect significant change in your long term financial health. You can set yourself up so that your answer to the question “if you changed nothing about your current financial plan, will you retire comfortably?” is a resounding yes. Nothing is as powerful in the world of investing as starting young.

Here is something you can do today: check out companies like WealthfrontLiftoff, and Acorns. These companies sit at the intersection of investing and technology. Sign up today. Focus on stocks. Once you are set up, get out of your own way.

You’ll notice that a lot of this plan is simply protecting your dollars’ potential and letting them grow. But your dollars won’t work for you unless you get things started. Like millennials themselves, these young dollars are full of potential. They just need to be put to work.


For more on how to get started, check out my new book Millennial Money: How Young Investors Can Build a Fortune, which is on shelves today.