This post is part of the #IwantDRAFT campaign with support from DRAFT, the app that uses crowdsourced data to help you understand and compare your portfolio, in partnership with Kasai Media.
There are millions of things fighting for the attention span of millennials.
With so much noise and so much to fit in each 24-hour day, it’s no surprise that things like investing fall off millennials’ priority list.
The unfortunate side effect of not prioritizing investing is that millennials typically end up making a number of common mistakes when investing.
Some of these mistakes are due to not understanding investing, while others are simply due to not looking at investments close enough. After all, I’ve suggested many times that the best thing to do with investing is simply get started and automate contributions to your retirement accounts. This can lead to mistakes, though, if there is not time and effort put into managing and tracking investments.
Today I want to talk about the top mistakes millennials make when investing. Besides simply listing off mistakes millennials make when investing, I also give suggestions on what to do to avoid or fix the mistakes.
Not Investing for Retirement
The first mistake millennials are making when it comes to investing is simply not investing. A 2014 Wells Fargo Millennial study found that 45% of millennials are not saving for retirement. Considering the positive impact that compound interest can have on retirement savings, especially those made in your 20s and 30s, it’s a big mistake for millennials to not invest for retirement.
The big reason that millennials are not investing is because they have a high level of debt. I am one of those millennials that graduated with undergrad debt so I can totally relate to those who feel they have too much debt to invest. Not investing in retirement may mean missing out on employer 401k and HSA matches. It also might mean missing out on the historical 10% return of the stock market. Most people’s debt is less than this, so I typically recommend paying the minimum on student loans and investing whatever you can. Note that this is not always a popular perspective.
If you haven’t started investing it’s easier than you might think. Even $100 a month can have a big impact when you are talking about decades of compound interest. Start small if you must, but make sure you start. Here’s 8 ways to start investing.
Investing too Conservatively
Millennials typically invest too conservatively considering their long investment horizon. According to CNBC, one study revealed that those ages 22 to 32 chose to put 75% of their retirement savings in cash and fixed-income assets.
The important thing to consider with millennials is that they are far from retirement and even when they reach retirement may live upwards of 30 years. The bottom line for millennials is this: they will have a long, long time to invest. The best way to make your money grow over a long investment horizon is through stocks.
Unfortunately millennials are not investing that way. A recent Bankrate.com survey reports that 4 in 10 young investors (18-29 year-olds) said that cash is their preferred way to invest. The problem with cash is that it doesn’t even keep up with inflation; cash is literally losing it’s value the longer it’s held.
That’s not to say that it’s a bad idea to hold cash, but it’s important to view cash savings for what they are: emergency funds and designated savings account for large purchases like a car or home. When investing millennials will want to get a very large percentage of their portfolio exposed to stocks.
The new DRAFT app allows users to view their investment type (conservative, moderate, or aggressive). It helps users understand what sort of investments they have, too, by showing what their asset allocation is. If you aren’t sure whether you are investing too conservatively, DRAFT can tell you.
Not Understanding Your Investments
The final mistake that millennials make is not understanding their investments. Perhaps you’ve been regularly putting money in a 401k or individual investment account. Do you really know what investments you have? What about management fees? How much money have you spent on investment management fees – and how much will it cost you if you keep your current investments?
DRAFT analyzes the amount you spend on management fees and how you line up with others in your peer group. Let’s say you spend 2% on fees on your investments. While finding out the percentage (and amount) you spend on fees may be useful, what’s even more useful is that DRAFT can show similar investments that have a lower management fee, say 1%. Over the course of 30 years this could mean a difference of tens of thousands of dollars. Or, looking at it a different way, you could make tens of thousands of dollars from making a simple change.
Fee analysis is only a small part of understanding your investments. As I mentioned already, understanding the relative riskiness of your investments is key. DRAFT takes it a step further and explains how an individual’s investments compare to comparable demographics’ investments. For security purposes these comparisons are always done in percentages.
The big takeaway is this: if you don’t understand your investments you could be losing money in fees, investing in a portfolio that isn’t diversified, and perhaps not investing as much as you thought you were. Using an app like DRAFT, which links to all your investment accounts regardless of company or type of account, can help you understand exactly what you are investing in and adjust accordingly.
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The great thing about being a millennial is there is time to fix investing mistakes while you still have a long investment horizon.
What investing mistake do you think is the most harmful to millennials? Have you or someone you know made any of the mistakes listed?
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Photo by Enrique Dans
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I think the biggest mistake that I see is that people don’t understand their goals well enough to invest appropriately. For example, if you have an unstable but high paying job, or you have the desire to take sabbaticals throughout your career then its going to be important to invest in at least some after tax investments rather than having everything tied up in retirement accounts.
I wrote an article for another site recently that shared some recent stats about millennials who invest. I can’t remember exactly, but I think the survey I shared said that only 26 percent of millennials owned stock.
That’s an incredibly scary figure, and it’s sad that millennials aren’t using the one advantage that is on their side – time.
Like Holly, I’ve seen some similar stats you’ve shared and it is pretty concerning. It’s understandable, on one level, why you’d want to hold back out of having debt but assuming it’s lower interest rate debt (like student loans) then you’re missing out on the time component – which is huge.
Another issue I’ve seen, in general, is a general distrust of the market and that you’ll only lose money. The only decade, over the past century, that had a loss was during the Great Depression and that was only a loss of less than 1 or 2 % I believe. Overall, historically speaking, you’re much better served by being in the market.
So true about investing too conservatively…I guess it’s because many saw what happened to stocks during the recession. But you’re not going to build a nest egg with ultra conservative investments…inflation will take a bite out of that. Millennials have a long time horizon so it’s okay to be a little more aggressive.
Investing for retirement is a must but the debt that millennials have often gets in the way of that. It’s important to realize though, that you have to prioritize debt payments and investment contributions as best as you can because you can’t get back the time you lose by putting off investing.
I think that a mistake we’ve been making lately is definitely being too conservative in our investments. My husband is more apt to take more risks with our money, but I am SO conservative that I think it really holds us back in a lot of ways by not partaking in more investments to make our money work for us instead of the other way around. I’m slowly but surely trying to improve in this area though :) I think it gets a bit easier as I see our savings steadily growing, it makes me feel more comfortable in taking larger risks in our investments in general.
Hannah UnplannedFinance Good point about not having everything tied up in retirement accounts. Ironically I literally just hours ago upped my retirement account contribution % haha. I don’t really plan on taking sabbaticals throughout my career, though.
Holly at ClubThrifty I’m not sure if the site you got the statistic from mentioned it, but most millennials who haven’t invested yet said that the reason they haven’t is because they have a high amount of student loans. I can definitely see if you look at an age 18-35 demographic that at least half wouldn’t invest. 26% though? that’s a pretty low number.
FrugalRules Good point about millennials not trusting the market. After all, millennials lived through the great recession and saw firsthand how investments were destroyed relatively quickly and houses were foreclosed on. It’s important to put SOMETHING in the market, though, so getting started is key for millennials.
Andrew LivingRichCheaply I think the difficult thing for millennials is that they simply can’t get the recession out of their heads. Count me as one of the many who are just waiting for the current market to crash. It’s important for millennials to recognize the long time horizon otherwise they will be overly influenced by fear of the market tanking and taking years to recover.
Chonce Yes, debt is a huge issue for millennials. I think a lot of people who aren’t in the millennial generation fail to realize just how much debt millennials are in, primarily from student loans. It’s a lot of downward pressure on your bank account.
Christina@EmbracingSimple I think you’re right that as time passes and your conservative investments grow you will be more keen to invest in aggressive investments. It definitely influence my decision to invest in IZEA (the penny stock I referenced in the previous post).
Many of my millennial clients keep too much money in cash in their bank accounts. I understand the mentality around this because investing can seem scary, but what’s scarier to me is actually losing the value of your money by keeping it in a bank account because it doesn’t even earn enough to beat inflation.
Besides my emergency fund, I’m 100% in equities. My investing horizon is so large that I can take the dips and turn them into opportunities to
I’ve definitely made the first mistake! I was in the military for about 8 years before I finally took advantage of the Thrift Savings Plan (kind of like a 401k). I still wish I’d have done it sooner!
blonde_finance Great insight, Shannon. I think having too much money in your bank account really is a GOOD ‘problem’ to have, but if you have enough cash you really want to start getting exposure to the stock market as soon as possible.
ferventfinance Good to hear! I also try to convey this point to friends, but some of them are in different spots. Honestly if you can just convince a few people to start saving AT ALL for retirement you are doing them a huge favor.
SimplySave Mistakes happen and we learn from them. But it definitely pays to get some exposure as early as you can. I don’t really “miss” the portion of my paycheck that goes towards my 401k. I think the sooner you get used to it the better!
If I was 25, I would have 100% in stocks. I am amazed that millennials are so afraid of the stock market. I guess investing early is more important that allocation, but if I could go back, I would use the beauty of compound interest and take advantage of downturns more than I did.
I see all these studies saying millennials are optimistic about their retirement prospects, meanwhile they’re holding practically everything in cash!
Eyesonthedollar Yeah millennials have seen some extreme ups and downs in the market, so it’s hard to blame hem for being conservative. At the same time if you are able to invest long-term those bubbles become less important.
brokeandbeau Yeah it’s really interesting how that works. I think debt plays into it as well. If you have your assets in cash and you hit a rough patch you will still be able to pay it off, versus if you have your assets in stocks where you might be forced to sell (or even worse, in retirement accounts that you can’t withdraw from).