Right now, you’re looking at your checking account and you see $2,500 (hopefully). Or, you’re taking a gander at your savings account and you see $5,000 (hopefully), which is paying just a dime’s worth of interest each month. This makes you ask yourself: "How can I turn this $5,000 into $6,500?" Investing is the answer.
The problem, unfortunately, is the unduly fact that millennials are not investing. In fact, they’re staying away from mutual funds, stocks, and other investment funds. The 20-somethings are standing far back away from the New York Stock Exchange, the Toronto Stock Exchange and the London Stock Exchange like the plague.
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But it’s completely understandable why millennials aren’t investing. Not only are they still working at paying off their student loans and trying to find a career, they’ve also witnessed firsthand the dot-com bubble implosion and the Great Recession, which essentially wiped out their parents’ finances.
This is turning the investment community upside down because, with baby boomers exiting the investing world and millennials apprehensive about entering, something has to give.
The keyword when it comes to investing, particularly for those who are concerned about losing a vast sum, is this: conservative. Being a conservative investor is the best approach for those who are terrified of market swings but also want to earn a nice annual return that is greater than the Consumer Price Index (CPI) or the 15-cent monthly return from a standard savings account.
Are you a millennial with a job, debt-free, and extra cash on hand? Here are eight steps to start investing today (remember, if you’re reading this, then you likely won’t be the next Gordon Gekko, but at least you’ll be better off than you were yesterday):
1. Analyze Your Finances with a Fine Comb
Before entering into the fun but sometimes intense world of investing, you must first take a look at your finances. In a perfect world, you have a detailed budget that lists your earnings, outlays, savings, emergency funds, and projections. Since we live in an imperfect world, you may not have a budget. So now would be the time to create one that has many points of information, including the aforementioned.
Moreover, if you’re living paycheck to paycheck, then it wouldn’t be wise to start investing 10 percent of your income. However, if you have several hundred dollars of disposable income, then you may want to consider investing a portion of that money.
As long as you have an emergency fund and six months’ worth of living expenses in case you lose your job, then investing is the next wise decision in your plight to investing success. It’s important to realize that you should have these first before you start going ahead with trading stocks and purchasing units of mutual funds.
2. Understanding the Rules of Money
You don’t want to enter a stock market blind. So why buy GICs, silver rounds, dividend mutual funds, and penny stocks blindfolded? You wouldn’t. What are we getting at? Well, you have to understand the rules of money. This is indeed wide-ranging, but here are a few things to ask yourself:
- What and how much taxes do I pay on any investment returns?
- How much am I spending on mutual funds, stocks, and precious metals fees?
- What are some of the best products around to meet my needs?
- Where do I get information and informed ideas about the market?
- Are there any account minimums when starting a brokerage account?
There are many rules about investing, especially when it comes to commissions and fees! Of course, the middleman needs to get his slice of the pie. Once you get an understanding of the very rudimentary elements of investing, you can move on from there.
Now that you have performed an analysis of your finances and learned about the rules of money, you can move on to the next step: selecting the various types of investment funds.
3. The Types of Investment Funds to Consider
The financial community has provided us with a long list of investment products. Here are some of the basic ones:
- Mutual funds: A readymade portfolio of stocks, bonds, and equities in a certain sector (energy, healthcare, entertainment, financials, and so on).
- Stocks: A share of ownership in a company.
- Bonds: An instrument of indebtedness of the bond issuer to the holders, which can consist of publicly-issued and corporate bonds, among others. Bonds can range anywhere from one year to 30 years. The lower period of time, the lower the interest.
- Guaranteed Investment Certificates (GICs): An investment that offers a guaranteed return on your investment over a certain period of time (30 days to 10 years). Again, the interest rate varies on the length of your holdings.
- Exchanged-Traded Funds (ETFs): A marketable security that tracks an index, commodity, bonds, or a basket of assets. This comes with a high degree of risk.
Each investment can be very lucrative or very poor. A mutual fund of bonds won’t provide you with anything more than a high-interest savings account, while a stock can provide you an opportunity to make a profit and give you steady earnings in the form of monthly or quarterly dividends. You sink or swim, whichever way the market’s tide turns.
4. The Luster of Precious Metals
Precious metals – gold, silver, copper, platinum, and palladium – are thousands of years old and come with many uses: sometimes money, sometimes technology. Whatever the case, precious metals have been used for a wide variety of things and are very dependable, either as an investment or as a currency.
Although you could acquire a stock or mutual fund that relates to gold or silver (mining, for example), purchasing precious metals directly can eliminate the middleman. Buying gold and silver can be done relatively easily by going to dealers or purchasing from an individual. It should be noted that you’ll be paying a buck or two above spot value and you have to pay for shipping (try to find deals where shipping is free above a certain amount).
Plus, gold and silver maintain their value. Just think about it: if you found a treasure chest of gold bars that was buried 1,000 years ago, they’d be worth something today. However, if you were to find $50,000 in the same treasure chest 1,000 years from now, then they won’t be worth much.
5. Look at Multiple Factors of a Stock
So stock has become your deciding investment of choice. You have to be careful, prudent, and patient when buying and holding a stock. If it’s up considerably at the time you purchased it and it goes down, don’t sell it right away. At the same time, if you bought a stock for $5 and it goes up to $7.50 in a couple of months, again: don’t sell it right away.
What we’re getting at is that you have to analyze an array of factors:
- How much dividends does it pay? If you’re buying a stock in a company that you know will be around for a long time – Starbucks, Microsoft or Apple – then be sure to look at the dividends.
- The 52-week range; you should always ensure the stock is closer to the 52-week low than the 52-week high.
- Earnings per share and cash flow per share (EPS/CPS). These should always be positive with positive growth during each quarter.
- The Price/Earnings Ratio (PE Ratio) should regularly be between 1.0x and 10.0x.
- Make sure that the volume is around 50,000 before buying a stock.
6. A Portfolio of Diversity
Whether you’re buying 10 stocks downright or you’re slowly accumulating your portfolio of stocks, you shouldn’t be purchasing in just one sector. You must diversify your portfolio to offset losses.
For instance, it would be foolish to buy 10 tech stocks considering how the market is in a bubble. Instead, you should buy into three or four sectors (financials, tech, food, and energy, as an example). Once a sector enters a bear market, your earnings will erode significantly and your portfolio will be in negative territory for a long time to come.
7. Contributing on a Regular Basis
Similar to saving, you should be contributing to your investment funds on a regular basis to catch both the ebb and flow of your funds. Whether it’s a mutual fund or a stock, you should be buying on a weekly, bi-weekly or monthly basis without fail. Regular contributions make a world of difference to your investment portfolio. Don’t be a fair weather investor and put money into a mutual fund whenever you feel like it.
8. Other Tidbits of Information
Here are some other tidbits of information and advice for your investing endeavors:
- Don’t panic. When the market is in a panic, then that is your time to shine.
- Pay attention to the business news stories and geopolitical strife.
- Ensure your portfolio is a majority of dividends because you have extra earnings. Plus, they’re a sign of a company’s strong fiscal health.
- Start small and build into a larger portfolio; don’t put all of your eggs into one basket.
- Find out about insider activity; whether an executive is buying or selling gives an investor a glimpse into what’s going on behind the scenes.
- Most importantly, be a long-term investor. Unless you’re a savvy trader, there is no point in holding onto mutual funds or stocks or GICs for a couple of months (unless, of course, the company is being sold off or shutting down).
- End your sin habits of gambling, playing the lottery or betting on games. You’ll have a better chance of improving your finances of playing the markets.
Investing is a lot of fun; not so much if you lose 90 percent of value! With that being said, there is just so much you can do with your money as long as you pay attention, perform your due diligence, and stay on top of things. In today’s environment of record-low interest rates and high price inflation, there is no point of having all of your money sit in a savings account earning 10 cents a month. You have to look at other options for your future.
Who knows? You might pick an amazing stock. Just imagine if you purchased just 100 shares of Valeant Pharmaceuticals five years ago. You’d be super rich today!
Now, about those bears talking about the stock market at a party...
What approach do you take when investing? Let us know in the comments section below!