A Millennial’s Guide to Investing
Most people have the common goal of investing for retirement. However, even with the same goal in mind, investors should adopt different strategies depending on factors such as age, risk appetite and investment knowledge. Amongst which, age should play a major role in how you should allocate your portfolio.
A 55-year old who is looking to retire at the age of 60 would require cash on hand to pay for future expenses. With that in mind, he should have a more liquid portfolio that is less volatile.
On the other hand, a millennial, who has around 40 years before retirement, has the advantage of time on his side. He can afford to adopt a more aggressive investment approach as he has time to recoup losses in the future.
In light of these differences, let’s look at three ways in which a millennial’s investment approach should differ from the more senior investor.
Stocks over bonds
Stocks typically have a much greater return than bonds over the long-term.
In the 10-year period between 2004 and 2014, the S&P 500 index returned 8.11% per annum. This is almost double the aggregate US bond index return of just 4.62% over the same period. It is important to take note though, that bonds usually have a stable coupon rate and are less volatile in nature, meaning that investing in bonds will result in a smoother and more predictable return. However, over the long-term, stocks will still tend to outperform bonds.
Millennials who have time on their side can be more willing to invest in a more volatile asset class, such as stocks, due to the ability to ride out short-term losses.
Growth stocks over income stocks
Growth stocks are typically more volatile in nature and trade at higher premiums to their counterparts. This can mean that if the company is unable to match investors’ expectations, there can be wild swings in the price. However, at the same time, growth stocks usually offer greater long-term returns due to its higher growth potential.
Income stocks, on the other hand, offer steadier dividend returns and are usually companies with stable businesses but less growth. Therefore, they may offer shareholders dividends, as they do not need so much capital to reinvest for expansion.
Again, millennials with time on their side can afford to ride the volatility of growth stocks and reap the potentially better long-term returns.
Emerging over developed markets
Over the long-term, emerging markets usually outperform their more developed counterparts due to greater growth potential in these markets. Between 2004 and 2014, developed market international stocks appreciated 6.32% per year while emerging market stocks returned 10.68% annually.
Emerging markets tend to offer an investor with greater returns over the longer-term but may have more short-term volatility.
The Foolish bottom line
Millennials who start their investment journey at a young age have time on their side and can afford to have a greater portion of their portfolio in higher-performing but more volatile assets. Nevertheless, as with any investment strategy, it is vital to diversify one’s portfolio such that no single investment affects your overall portfolio performance.