Millennial Money

Imagine turning $10,000 into $4.7 million by simply starting early and sticking to a plan. This book guides Millennials in making their money work for them.

1. Start Investing Early for Maximum Growth

The earlier you invest, the more time your money has to grow and compound. Waiting too long can significantly limit your returns. Starting at 22 rather than 40 can lead to vastly different outcomes for your retirement savings.

Investing young allows you to take advantage of compounding, where the returns on your investment also start earning returns. Even if you're putting in just a moderate amount annually, the snowball effect over decades creates remarkable wealth. As the book explains, earning an average return of 7% annually can turn yearly $10,000 contributions into millions by retirement age.

Millennials, however, are less likely to invest compared to earlier generations. This hesitation largely stems from entering adulthood during the 2008 financial crisis, an event that instilled fear and mistrust of financial markets in many. Consequently, only 28% of Millennials’ assets are in stocks, significantly lower than other age groups.

Examples

• Investing $10,000 annually from 22 to 65 at 7% can yield $4.7 million.
• Starting at 40 with the same contributions only yields about $1 million.
• The 2008 financial crisis created a generational trend of risk-aversion among Millennials.

2. Rising Debt and Aging Population Jeopardize State Pensions

Depending on government pensions is risky for Millennials due to growing public debt and an older population. Pension costs are increasing drastically as life expectancy rises, leading to strained resources.

In 1900, life expectancy was 47, but by 2013, it had risen to 79. Medicare costs, for example, have grown by 11% annually since its launch in 1966. These trends show that government funds are being stretched thin. Beyond that, there’s a $9.6 trillion gap predicted between future pension costs and anticipated tax revenue for the next 75 years.

Thus, Millennials can no longer count on governmental support when they retire. This generation pays taxes to support today’s retirees but may not receive equivalent benefits in the future. Self-reliance through stock market investment becomes an important strategy for ensuring financial stability.

Examples

• The average life expectancy increased from 47 in 1900 to 79 in 2013.
• Medicare spending has risen 11% annually on average since its inception.
• A $9.6 trillion funding gap between tax revenue and pension expenses threatens Millennials' future benefits.

3. Diversify Globally to Protect Your Portfolio

Relying on stocks from just one country is dangerous. Economic downturns can wipe out your investments, so spreading your portfolio across different regions minimizes risk.

For example, Japan’s stock market in 1989 seemed unstoppable. Investors flocked to the Nikkei, which grew by 30%. Yet, when the bubble burst in 1991, the market lost value quickly, halving investors’ portfolios by 2013. This shows that depending on a single country’s economy is risky.

Global diversification also allows you to take advantage of shifting currency values. When you invest in companies based in foreign currencies, a strengthening currency adds value to your returns. Holding a mix of stocks from companies worldwide can mitigate risks and even boost earnings when one region performs poorly.

Examples

• Japan’s booming Nikkei market in 1989 lost half its value by 2013.
• American investors favored domestic markets in 2010, holding 72% of their funds in US stocks.
• Investing in global corporations like Samsung allows currency fluctuations to enhance gains.

4. Avoid the Herd and Think Outside the Box

Copying popular strategies doesn't lead to exceptional returns. For instance, investing in “market leaders” rarely beats the market over time.

Market leader strategies often focus on popular large companies tracked by indexes like the S&P 500. While stable, these funds simply mimic the market’s growth and hardly ever outperform it. Moreover, companies at their peak often struggle to maintain high returns, as seen with giants like Apple and Intel after reaching $400 billion valuations.

Instead, the “bargain” strategy, which focuses on undervalued stocks, consistently offers higher returns. The Russell 3000 index (which leans on this principle) has outperformed the S&P 500 by over 1,100% since 1979, proving that chasing less glamorous stocks can yield better results.

Examples

• Index funds tracking the S&P 500 don't outperform the market.
• Apple and Intel tend to decline in performance once they grow too large.
• Since 1979, bargain-focused Russell 3000 has outpaced the S&P 500 by over 1,100%.

5. Combine Value and Momentum for a Winning Strategy

The ideal approach mixes value investing with momentum. Seek undervalued stocks with strong growth potential, but also consider timing.

Value investing focuses on buying stocks with low prices relative to financial performance. To ensure these stocks have prospects for future growth, evaluate their earnings and whether they generate cash flow. Combining this analysis with momentum involves identifying stocks that have recently gained traction, indicating increased investor confidence.

When done right, this mix produces higher returns in the long term. Since 1972, stocks fitting both a value and momentum profile have grown at twice the rate of the overall market, proving this method’s long-term success.

Examples

• Buy stocks that are undervalued but have strong financials and potential for growth.
• Look for stocks with significant price increases over the past six months.
• Stocks meeting the value and momentum benchmarks have doubled market averages since 1972.

6. Avoid Emotional Decisions in Investing

Fear and greed often lead to poor financial decisions. For instance, selling off investments during market downturns locks in losses.

Humans are naturally prone to fearing loss more than celebrating gains. Studies confirm this tendency, like one where participants avoided investing if they’d recently lost money, even when the odds were in their favor. Similarly, financial bubbles occur because people focus excessively on potential rewards, ignoring underlying risks.

Automated investing helps eliminate these emotional pitfalls. Setting up automatic bank transfers into your investment account ensures consistent contributions without being derailed by feelings. This systematic approach prioritizes logic over instinct.

Examples

• Projects show people stop investing after losses despite favorable odds.
• Bubbles arise from reward-focused mindsets, driving irrational risk-taking.
• Automation ensures your emotions don’t interfere with your investment plan.

7. Think Long-Term for Greater Success

Short-term thinking sabotages returns. Successful investing requires patience and understanding the long-term upward trend of markets.

Market fluctuations often dissuade new investors, prompting them to sell assets prematurely. However, long-term data reveals that markets generally rise over time. For instance, stocks only lose value during 31% of one-year periods but never decrease over any 20-year span.

Even professional investors fall into short-term traps, creating strategies designed to succeed within shorter timelines. In contrast, individual investors who aim for 30-year horizons tend to benefit immensely from compounding growth.

Examples

• One-year windows show declining stocks 31% of the time; 20-year windows show no losses.
• Long-term planning avoids market panic from short-term downturns.
• Professionals' short focus prevents them from capitalizing on decades of growth.

8. Avoid Home Bias in Investments

Investors lean toward businesses in their home country, but this can limit growth and increase vulnerability during economic crises.

Home bias restricts exposure to international economic trends and emerging markets. While American stocks may seem stable, concentrating solely on them ignores the growth in areas like Asia or Europe. Additionally, foreign investments help diversify asset risk and can act as a hedge against domestic market failures.

Balancing your assets globally gives you a better shot at stable, long-term returns. Emerging markets often demonstrate faster growth trajectories compared to developed nations, making them attractive additions to your portfolio.

Examples

• 72% of American investments in 2010 stayed within the U.S.
• Japan's market crash shows the risk of relying on a single nation.
• Emerging markets drive growth, offering better return opportunities.

9. Taxes Can Impact Your Profits

Smart investors consider tax implications when planning their portfolios. Selling stocks too quickly could lead to higher taxes, undercutting earnings.

Holding on to profitable stocks for at least a year often qualifies those gains for lower long-term tax rates. This simple tweak makes a significant difference to accumulated wealth. Tax-efficient funds or retirement accounts like Roth IRAs also reduce the tax burden while growing investments over decades.

Strategic timing ensures you keep more of what you've earned, so it’s worth factoring taxes into every financial decision.

Examples

• Short-term asset gains are taxed higher than long-term gains.
• Roth IRAs allow tax-free investment growth in the U.S.
• Holding shares for a year lowers U.S. capital gains tax rates.

Takeaways

1. Start investing as early as possible to maximize compounding growth over decades.
2. Diversify across global markets to protect your wealth and take advantage of global growth.
3. Set up an automated investment plan to avoid letting emotions drive your financial decisions.