Did you know that Millennials are the most likely age group to have five months’ worth of cash savings set aside for a rainy day?
The findings might surprise you if you’ve bought into the idea that Gen Y doesn’t know how to manage their money. We might not have too much of it, thanks to student loan debt and a rough economy with a tight job market -- but apparently, we save when we can.
However, we do have a problem when it comes to investing what we saved. Millennials as a whole have less than one-third of our assets in stocks. We’re sitting on more cash than any other generation.
It’s understandable, given the we had a front-row seat to the market collapse in the Great Recession. But keeping all our savings in cash isn’t logical. As adverse to risk as we may be, hoarding cash presents another type of risk: losing the value of our savings over time to inflation.
Millennials need to understand that certain investor behaviors in the market are what trigger huge losses that are hard to recover from for average people. Yes, the market will have its ups and downs. And those low points are tough.
But average investors do more damage to their wealth than even a big market crash can do on its own.
Here are 5 ways you're guaranteed to sabotage your investments!
Failing to diversify your portfolio
It may be a cliche, but people warn against “putting all your eggs in one basket” for a reason. Keeping a portfolio all in one asset is a sure way to mess up your investments. If you invest solely in stocks, your wealth is in for a wild, volatile ride -- and there’s nothing to balance the mood swings of the market.
On the other hand, if you’re invested in conservative assets like bonds (or cash!), you’re unlikely to make any progress on growing the value of your nest egg. And these investments, though considered less risky than stocks, are still subject to some level of risk as mentioned before.
A well-balanced and diversified portfolio helps you reduce the risk you carry with your investments. If one asset plummets in value, the entirety of your wealth won’t fall through the floor with it. Your range of assets will help balance the ups and downs.
Listening to hype from friends and the media
Want to mess up your investments faster than you can say “asset class”? Follow that hot tip a co-worker dropped at the watercooler this week and grab a few shares of that technology startup that is completely unproven. Or the next time the headlines and news shows are broadcasting doom and gloom for the markets, rush to pull your investments in stocks and sit on cash for a while, instead.
Hype is just that -- hype. Your friends may enjoy playing stockbroker, but that doesn’t mean they know any better than the next guy what stock will be next to experience exponential gains. (They also don’t know when that stock will come crashing down again, either.)
And media outlets intentionally play on your emotions. No one would pay attention to a headline that read, “market seems to be doing what it’s done for 100 years; we can all carry on;” or a news anchor that said, “we experienced a market fluctuation today, but this is completely insignificant if you’re a long-term investor who won’t retire for 30 years.”
The media needs sensationalism to capture and hold your attention. They’re also focused on today, not ten, twenty, or thirty years from now. That’s where your own focus should be if you’re looking to grow serious wealth.
Not investing for the long-term
Speaking of focusing on the future rather than today, not investing for the long-term is a great way to mess up your investments. People do this when they try to pick stocks, actively buy and sell (or attempt to short-sell), and chase the quick, aggressive gains.
Yes, it is feasible that you could do a bit of research, choose a stock that sells for $10 per share today, and then make a huge return if you sold it for $100 per share in six months. What’s not feasible is that you could pull this off time and time and time again.
The more realistic scenarios? You choose the wrong stock and it only drops in value from the get-go. You sell too soon and miss the biggest gains. You sell too late and still end up losing money because you missed the peak. You’ll end up racking more in fees and taxes than you earn on trading.
Invest for the long-term and choose a passive investment strategy. That means you’re not making day trades or spending any time at all pouring over the numbers. You don’t need to if you’re investing in low-cost index funds that track a segment of the entire market (or, actually track the whole market).
Giving in to groupthink
The investor who does a good job messing up their investments is one who gives in to groupthink and follows the herd.
I’m sure you’ve heard Warren Buffett’s famous line about buying and selling stocks a million times before: “Be fearful when others are greedy and greedy when others are fearful.” But do you understand what it means?
Buffett is telling us that the prime time to jump into the stock market is when everyone else -- the herd -- is panicking. When the majority is trying to shed stock with the urgency of putting out the flames if your hair caught fire, values of shares go down...which means you can start buying those shares at a low price. It’s like a discount sale on the market.
But people have a hard time doing this, because of bad investing behavior #2: when they tend to listen to the hype. We give in to groupthink and when everyone else is fearful, we grow uneasy too.
On the flipside, Buffett says we need to start becoming very cautious when that same herd starts getting excited about the market. When the majority goes on a buying spree and stock values start soaring, it’s reason for concern. It becomes expensive to buy stock, and high values could indicate a bubble somewhere. And bubbles always burst.
Trying to time the market
So how do you avoid giving in to groupthink, anyway? It goes against our nature to do what it takes to successfully buy low and sell high.
And that’s exactly why you shouldn’t attempt to do it. It’s almost impossible to get it right every time. Timing the market leaves you vulnerable to missing out on big gains and showing up to the party right as everything crashes.
Avoid groupthink -- and messing up your investments -- by choosing not to try and time the market. Instead, make regular, consistent contributions to your investment accounts. Make it automated. At the end of ten or twenty years, you’ll have more wealth by consistently contributing $100 per month to your investments than you would had you sporadically tried to pour in $600 twice a year at exactly the right time.
If you can avoid these bad investing behaviors, you have no reason to shy away from the market. Don’t make emotional decisions or try to time the market. Do choose a passive investment strategy instead of attempting to pick stocks or chasing aggressive returns year after year.
Remember, keep it simple. Average investors do a much better job of messing up their investments than the market alone does.
There’s no reason to fear investing in order to grow your wealth if you don’t try to do your best Wolf of Wall Street impression -- you’re in it for the long haul and you can let harsh losses and soaring returns even out over time.
Still not convinced? I’ll leave you with this: historically, that “evening out” has equaled to a 10% average return from the market. Compare that to the loss you’ll take on your savings due to inflation if you let you money sit in cash earning 1% (or less) of interest.