Millennials may be the largest generation there is, but are they the smartest when it comes to retirement? It remains to be seen.
As the age bracket from 18 to 34 moves into the prime income earning years of their lives, it's important for them to remember just how crucial it is to prepare for retirement even from the very first paycheck out of college. Saving a sizeable chunk of your income is an unavoidable step to retire well, but investing in the stock market could offer enormous returns.
So how can millennials aging into adulthood make sure they invest in the right kinds of stocks?
Say No to Trend Investing
One key is to avoid fads. It's hard to forget the carnage wrought on millennial investors who dumped their money into Snap Inc. (SNAP - Get Report) because they were big fans of the company's Snapchat app.
Snap shares are down about 39% since going public. But still, the median age of Snap investors last fall was 26 -- right smack in the middle of the millennial age bracket.
It's important to think about the fundamentals. Does the company have prospects for growth outside of one core product? Is the CEO a proven leader? Do earnings prospects appear strong?
Plus, does it offer a dividend? Reinvesting dividends back into the stock market can result in a hefty amount of compound interest by retirement. For example, consider Action Alerts Plus holding Nvidia Corp. (NVDA - Get Report) . It has raised its dividend every year since 2012. That could mean major returns over the next decade or more.
Sit Back and Relax
After all is said and done, many millennials who aren't avid market watchers may not have the time to monitor stocks as closely as is necessary to make money long term. In that case, consider a mutual or index fund.
Take Warren Buffett's lead here. He placed a bet with hedge fund Protege Partners in 2008 -- ahead of the financial crisis. Per the terms, Buffett contended that an S&P 500 index fund would outperform a hand-picked hedge fund portfolio over 10 years, a classic passive versus active scenario.
Even after Buffett's fund lost 37% of its value in the crisis, it still came out far and away the winner when the $1 million bet expired Dec. 31, 2017. At the end of 2016, Buffet's bet had gained 7.1% per year, or about $854,000 total. Protege's bet had gained 2.2% per year, or about $220,000 total.
A mutual fund takes the guesswork out of investing, and a large portion of employers offer sponsored retirement plans with target-date funds that handle when, where and how to invest.
Do It While You're Young.
When you're a young investor, you have a little more wiggle room to take risks and ride out market turbulence. But when it comes to your retirement, risk shouldn't even really matter. Buying stocks when you're young is essentially like buying them on sale.
As dictated time and again, the stock market generally moves in an upward trajectory. If you're 30 now, even the longest recession won't last until you're 65. Barring some enormous, market-upending, capitalism-wrecking event, the stock market is all but guaranteed to earn you money over the long run.
Think about it this way: when you go shopping and see your favorite store having a sale, you buy something, right? You know you'll want it down the road -- might as well get it while it costs less. That's exactly how millennials should think of stocks.
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