Gen X, Gen Y and Millennials: 9 Ways You Need To Invest Like A Rich Guy

If you’re a younger investor, say, Gen X down to Millennial, this is a very interesting time to be an investor, because the world is in disarray in a way we haven’t seen in a long time. The surprise election last week is creating waves of uncertainty in many areas of our economy: will the Affordable Care Act survive? What trade policies will be implemented? What about immigration? Is globalization dead? How is the market going to react? Should I invest, or wait for things to calm down?

If this sounds familiar, you’re not alone. Younger investors are struggling to make sense of a very rapidly changing world. In uncertain times,  it’s very common to focus on short-term market or global events. This is a critical mistake, because your goals are still way out there in the future.

Millennials are probably the most “tuned in” generation ever, and while Gen Xers aren’t too far behind them, they all share an equal distrust of the institutions that govern our lives. We don’t trust government, media, or Big Business. We don’t eat genetically modified foods and strive for clean, even primal diets. We’re rejecting conventional medicine and seeking alternative therapies at record rates. One recent WSJ article showed that only 1 in 5 Millennials has ever tried a Big Mac. That inherent fear and loathing of what has come before also tends to make us very conservative investors.

But whether you trust the institutions or not, they govern how the world works. Rich Guys know and accept this, and work within the system even while they strive to make changes to it. We need to do the same.

So embrace the system as it is. Use it to your advantage.

Here are 9 “maxims”  to help you do that. As a younger investor, you need to do these things when you craft your long-term investment strategy. This is assuming that we are talking about their long-term money (like, retirement and college), and not for something in the next few years, like a new car or a home purchase.

1 | Be as aggressive as you can stomach.

Risk and reward are like rails on a train track: where one goes, the other goes. It is very common for me to see young people invest too conservatively, only to reach age 50 and now want to invest far too aggressively to try to make up for lost time. The time to invest aggressively is before age 50, not after.  You should still invest in a diversified portfolio for your serious, long-term investments (gamble with money you can afford to lose), but that should be heavily weighted toward small and mid-cap stocks, like 80+% of the portfolio.

Buy Low Sell HighOne thing you can remember to help you deal with market volatility when you are investing aggressively is that as a young person, you actually BENEFIT from big drops in the stock market, because you are buying. So for you, a down market is just like a sale at the department store. And the best time to buy anything, especially investments, is when they are cheap. It’s when you are 75 and having to sell some of your investments each month to pay your bills, that a down market is a very bad thing. But for a 20-something, the more awful stock market periods you can encounter, the better.

2 | Time is your ally. For now.

If you aren’t familiar with the concept of compound interest, you need to be. It’s called compound interest (as opposed to simple interest), because you earn interest each time the interest is calculated, it’s earned on both your principle AND on the interest you’ve already received. A great article that gives you a lesson on how compound interest works for you (or in the event of debt – against you) is this one from Business Insider.

In simple terms, compound interest makes small amlunts of money grow exponentially, if given enough time. The younger you are when you start investing, the less money it will take to reach your goal, because you have the time to let compound interest work in your benefit. But the longer you wait, the less compounding will take place; you’ll have to fund it yourself because you didn’t give it time to grow.

By the way, compound interest is also why it’s critically important to follow the first rule. At 3%, it takes 48 YEARS for $10,000 to become $20,000. At 8%, given the same amount of time, the same investment will grow to $160,000.

Same amount of money, same amount of time. Just a different interest rate.

As you can see, it’s critical to be as aggressive as you can stomach, for as long as you can.

3 | Do not try to be a contrarian.

The markets are too efficient, with hundreds of thousands if not millions of trades every minute. There is not likely to be an opportunity to successfully second-guess the broader market on an investment – there are just too many eyes and algorithms on the markets now. “The trend is your friend.”

Don’t think you “know better”, and be really suspicious of anyone who claims to.

4 | Invest in what you know.

Millennials are probably better opportunistic investors than most, because they are so in-tune with trending technology, the latest fads, and what’s “hot”. You will likely catch a great IPO opportunity, or just know of a stock that may rise sky-high, simply because you and your friends are already aware of the company and its products. That knowledge is very helpful for your more speculative investing! Use it.

Gen X and Gen Y aren’t as quick to adopt new technology, but you can certainly watch and follow what’s trending with your kids.

5 | Don’t be too much of an activist.

business-764929_960_720It’s fine for your investments to reflect your values and support your causes when they can – IF (and only if) – you can still meet your financial goals. There are a wide variety of socially-responsible “impact” investing opportunities out there, but there is often a trade-off compared to more mainstream investments. Socially-responsible investments (SRIs), faith-based investments, and other values-driven investing often have to sacrifice returns to achieve the broader social objectives. Many are illiquid and difficult to sell at a moment’s notice. And social causes, like anything else, can fall out of fashion.

It’s better to focus on your long-term goals, than worry if you own half a share of Phillip Morris. Stay pragmatic about your long-term investing dollars. Keep retirement or college savings goals apolitical, and instead donate money (and volunteer your time and talents) to the causes you care about.

6 | You need to be very, very stingy about fees.

High fees over 40 years can literally devastate your account’s growth potential. There is no need anymore to buy expensive A-share mutual funds to create a portfolio, and you certainly don’t need to be paying a stockbroker commissions on funds you can easily buy yourself. That world has passed. Look for low-cost exchange traded funds or index funds for the majority of your “core” investments, and look into using a robo-advisor for your account management. Most have very low platform costs and are very tech-friendly. (Full disclosure, my firm, nVest Advisors, offers a hybrid robo / human advisor account with no minimum account balance, for less than 1% per year.)

7 | Don’t count on social security.

Even if the program exists in 40 years, it won’t look like it does today. Many economists are predicting cuts to benefits, a much older retirement age before benefits kick in, and certain “windfall” exemptions, where if you have other sources of income already, like a pension, you may get reduced or even no benefits. Anyone Gen X or younger MUST plan to finance most of their own retirement.

8 | If your company offers one, you need to use your 401k (or similar).

Especially if the company matches your contributions, which many to, up to 5 or 6% of your wages. That’s 100% free money! Plus, the maximum contribution limits are much higher than you’d have in a personal IRA account.

9 | Your taxes are going to be much higher than your parents’.

The simple truth is, our country has promised a LOT of money for entitlement programs to future retirees – $121 TRILLION and counting in “Total Unfunded Liabilities” (see www.usdebtclock.org). The only way we as a country will even have a hope of meeting those obligations is by raising tax revenue. What that means is, younger investors – those under 45, for sure, need to take advantage of every opportunity to save in tax-efficient ways.

The single best bit of advice I can give for your long-term tax savings is to save in a ROTH IRA, or if your company permits them, make ROTH contributions to your 401k. ROTH accounts are just traditional retirement accounts taxed backwards. Instead of taking a tax deduction now when you contribute, and paying tax when you use the money in retirement, ROTH lets you do it in reverse – you use after-tax money to make your contributions, and later, in retirement, that entire pool of money, no matter how big it grows to, is federally tax-free.

Jeremy Torgerson

Jeremy is a semi-professional actor, full-time financial advisor (nvestadvisors.com), and the owner of "Think Like A Rich Guy". Jeremy writes frequently for Investopedia and other outlets, and is quoted in national media on a variety of financial subjects. Jeremy lives in his home city of Denver, Colorado.

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