Investing Strategies and Risks for Millennials
Path to Financial Responsibility
The younger a person is, the less likely they have prudent financial obligations (a mortgage for instance). That allows younger individuals to make way for some higher risk investments in their portfolio, which may return higher yields.
While I was actually writing this up, the CNN Money app, (which regardless of your political alignment, I recommend for sure) sent me this article. Below is the key excerpt regarding general housekeeping guidelines.
Most 23-year-olds aren’t swimming in extra cash, and there could be better things to do with you money before investing in the stock market.
First, build an emergency fund that can cover three to six months’ worth of expenses. This is your lifeline if you lose (or quit) your job, or an unexpected health scare brings on a ton of medical bills. You want to have this cash on hand for when you need it and not have to worry about losing some when the market falls.
Second, get a handle on your monthly expenses, including any student loan bills. Pay off high-interest credit card debt before even thinking about investing.
Third, decide what your goals are. Ask yourself: What are you saving this money for? This will help you determine whether to invest your money, how much to invest, and what to invest in.
Maybe you’re saving for a wedding, an engagement ring, starting your own business, or buying a home. If the goal is coming up in the next four years, don’t put that money in the stock market, said Boneparth.
Since folks in their college and early career days are diverse in their up bringing, the above may seem rudimentary. To others, it may prove valuable. Some of the methods by which people use their capital and build their first portfolios can vary, but below are some youth-targeted ways.
The Advent of Youth-facing Financial Apps
Brokerages
Robinhood’s value is that it’s a mobile app that allows customers to buy and sell stocks on U.S. exchanges commission-free. They make money by selling stock trading information to hedge funds (called a payment for order flow).
Investopedia stated:
The company hopes to capitalize on the vast, largely untapped market of would-be Millennial investors.
A key trait of many of these apps is the targeting of younger individuals by lowering the barrier to entry. Simplicity, low or no fees, and ease of use are traits popping up.
Essentially, what Canadians say is the Canadian version of Robinhood is Questrade due to low commission fees.
Portfolio Management
Managing one’s own portfolio is the cheapest option, but takes a bit more effort. (A little time plugging numbers into spreadsheets and purchasing shares). Automatic advisors are more expensive, but you don’t have to do much of anything. Wealthsimple is a prime example of this, at least in Canada.
Risks
Firstly, not all investments perform well at the same time. Different types of investments are affected differently by world events and economic factors such as (interest rates, exchange rates and inflation rates). Secondly, a portfolio with diversification will have lower total risk than combined risk of the individual investments.
Here is a broad range of risks one should be aquatinted with:
Market Risk
- Equity risk is related to an investment in company shares. The market price of shares varies all the time depending on demand and supply.
- Interest rate risk is related to debt investments such as bonds. It is the risk of losing money because of a change in the interest rate. For example, if the interest rate goes up, the market value of bonds will drop.
- Currency risk usually refers to foreign investments. It is the risk of losing money because of a movement in the exchange rate. For example, if the U.S. dollar becomes less valuable relative to the Canadian dollar, your U.S. stocks will be worth less in Canadian dollars.
Liquidity Risk
The risk of being unable to sell your investment at a fair price and get your money out when you want to. To sell the investment, you may need to accept a lower price. In some cases, such as exempt market investments, it may not be possible to sell the investment at all.
Credit Risk
This refers to the risk that the government entity or company that issued the bond will run into financial difficulties and won’t be able to pay the interest or repay the principal at maturity. Credit risk applies to debt investments such as bonds. You can evaluate credit risk by looking at the credit rating of the bond. For example, long-term Canadian government bonds have a credit rating of AAA, which indicates the lowest possible credit risk.
Concentration Risk
The risk associated with not diversifying a portfolio.
Reinvestment Risk
The risk of loss from reinvesting principal or income at a lower interest rate. Suppose you buy a bond paying 5%. Reinvestment risk will affect you if interest rates drop and you have to reinvest the regular interest payments at 4%. Reinvestment risk will also apply if the bond matures and you have to reinvest the principal at less than 5%. Reinvestment risk will not apply if you intend to spend the regular interest payments or the principal at maturity.
Inflation Risk
The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation. Because inflation weakens the purchasing power of money over time — the same amount of money will buy fewer goods and services (which is why 25 cents was worth a lot more 100 years ago). Inflation risk is more relevant if you own cash or debt investments like bonds. Shares and real estate, however have their own forms of protection against inflation (by raising share and rent prices over time)
Horizon Risk
The risk that the time you’ll hold your investment (the investment horizon) may be shortened because of an unforeseen event (like losing your job or having a car problem). Sudden life events like this will cause you to sell your investments inorder to deal with them. If you must sell at a time when the markets are lower, you may actually lose money because of being forced to sell when you didn’t expect to.
Longevity Risk
The risk of living longer than what you planned for (mostly applies to elderly individuals).
Foreign Investment Risk
You will be onboarding risk that doesn’t exist in your home country.
Usually, the real world case ends up being that 99% of revenue comes from one source, and the rest from some interest on an RRSP for example. Buffett prompts us to think differently.
