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All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication. SHARE: Xavier Lorenzo/Getty Images May 24, 2022 Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can plan for their financial futures. Lance Davis is the Vice President of Content for Bankrate. Lance leads a team responsible for creating educational content that guides people through the pivotal steps in their financial journey. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Investing disclosure: The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Millennials haven’t had it easy. Growing up, the generation born between 1981 and 1996 experienced the attacks on Sept. 11, subsequent wars, the worst recession since the Great Depression, a student loan crisis and a global pandemic. It’s understandable why they may not have had at the top of their minds. But with most millennials done with school and having worked for at least a few years, many are at an age where they can and should start thinking about investing and how it can help them achieve long-term financial goals. Let’s take a look at some and why it’s important to get started. Why it s important for millennials to invest
If you witnessed the 2008 financial crisis or are impacted by the current in 2022, you may perceive investing as risky, but not investing carries risk, too. “The worst thing you can do in your mid-20s to mid-30s is not save money and invest. If you invest money early on, it gives your money a long time to grow,” says Mike Kerins, founder and CEO of RobustWealth. He says that despite the ups and downs of the market, it’s rare that the stock market stays down for a long period of time. Stock investments deliver bigger returns over cash and bonds in the long run. Money sitting in is stagnant and subject to rising , whereas stock market investments can compound over the years. More specifically, large capitalization stocks returned roughly 10 percent compounded annually from 1926-2020. Over that same time period, long-term government bonds returned only about 5.5 percent annually and T-bills returned around 3.3 percent annually. “The surest way to build wealth over long time horizons is to invest in a of common stocks,” says Robert Johnson, professor of finance at Creighton University and chairman and CEO of Economic Index Associates. The other advantage of investing money over time is that it creates a snowball effect. “Millennials need to begin compounding early and let that compounding work its patient magic over decades,” Johnson says. Compounding means that when you earn interest on your , you also earn interest on that interest. This allows you to build a larger and larger balance over time — even without extra capital investment. For example, if you invested $6,000 per year when you were 25 years old, and earned $100 that year in interest, at 26, you’d earn interest on $6,100, then on $6,300, then on $6,600, and so on. Over the years, you’d have a significantly larger return than if you just deposited that money in a savings account or hid it under the mattress. (Check out Bankrate’s .) Learn the basics of managing your investments
Risk tolerance: Before making your first investments it’s important to understand your . Risk tolerance refers to your ability and willingness to handle investment losses, which might be temporary or permanent. While the tends to rise over the long term, it can and has experienced severe declines over shorter time periods. You’ll want to think about whether you have the stomach to stick it out during those periods of decline, or if you might be better off in . Asset allocation: As you develop and build your investment portfolio, you’ll need to determine how much of it should be allocated toward stocks versus other assets like bonds or real estate. Assets can even be broken down further into buckets based on geography, investing style or type of company. This mix is referred to as your and will likely shift from being mostly risky assets early on in your investing life to safer assets as you move into retirement age. Active vs. passive: Another key decision you’ll need to make is whether you want to be a . Active investors attempt to beat popular market indexes such as the by investing in companies they think will outperform. Passive investing, sometimes referred to as index investing, seeks to match the performance of the broad indexes and is available to investors at very little cost. This cost savings has generally meant that passive investors have outperformed active investors over long time periods. Diversification: Put simply, diversification is the financial equivalent of the old adage, “Don’t pull all your eggs in one basket.” By , you’re spreading your assets across several different assets, recognizing that some will do well and others will do poorly. Broad diversified portfolios have performed well over time. Time horizon: Knowing your is a critical step in any financial plan. Identifying key goals, whether it’s saving for retirement or a child’s education, will have a big impact on how you invest. Long-term goals — at least five years away — will typically result in owning long-term assets such as stocks. Short-term goals such as saving for a down payment on a house will be better served by investing in safer assets such as a . Most common types of investment accounts
IRA: An , is an account that will allow you to save for retirement while offering some meaningful tax advantages. Money contributed to an IRA will be allowed to grow tax-free, allowing you to compound at a higher return than if you paid taxes along the way. You contribute funds pretax, which could lead to a lower tax bill today. Withdrawals can begin at age 59 1/2, at which point you’ll pay taxes on the money you take out. Roth IRA: While similar to a traditional IRA, a has some key differences. Money contributed to a Roth IRA is done so after taxes are paid, so there’s no immediate tax benefit. But when withdrawals begin at age 59 1/2, you won’t owe any taxes. The is one of the best vehicles to save for retirement because of this big tax advantage. Keep in mind that from both Roth and traditional IRAs will usually come with a 10 percent penalty. 401(k): A is one of the most popular workplace retirement plans. The plan allows employees and employers to set aside a portion of earnings to be invested for retirement. Many employers offer to match what employees contribute up to a certain amount. This match is important to take advantage of because it’s almost like free money from your employer. Contributions are allowed to grow tax-free, but withdrawals, which typically begin at age 62 or 63, will be taxed. Brokerage: A brokerage account allows you to invest in securities such as stocks, bonds and ETFs. Brokerage accounts are taxable, which means you’ll pay on any realized gains in this type of account. If you’re already maximizing your retirement savings through accounts like 401(k)s and IRAs, a brokerage account can be an additional way to build wealth over time. Many online brokers offer free trading commissions and you’ll be able to access your money penalty-free whenever you’d like. These are just a few of the most popular types of accounts, . Best investments for millennials
Stocks: For millennials, most investing goals will be goals such as retirement, which will be best accomplished through . A stock is a partial ownership interest in a business and over time, the similarly to the way the underlying business performs. You can invest in stocks by purchasing them individually or through ETFs and mutual funds. Index funds: are mutual funds or ETFs that seek to match the performance of an index such as the or the . Index funds can be used to invest in stocks, bonds or even real estate. Because are passively managed, they typically have very low costs, which leaves more of the return for investors. Index funds are a great way for investors to build a broad diversified portfolio while paying very little or nothing in fees. ETFs: Exchange-traded funds, or , is a type of fund that holds a basket of securities, but trades throughout the day similar to a stock. You can invest in stock ETFs, bond ETFs, commodity ETFs and countless others. Many ETFs are passive and track indexes such as the S&P 500 or the . ETFs can be a great way to build a diversified portfolio even if you don’t have much money to invest. Unlike mutual funds, ETFs typically don’t have a minimum investment. Mutual funds: A is a pool of money from investors invested in a group of securities such as stocks or bonds. Your investment in the fund will be invested in the same way that the overall fund is invested, so if the fund has five percent of its assets in Microsoft, your investment will also have five percent of its assets in Microsoft. Unlike ETFs, mutual funds only trade once a day and investors transact at the closing NAV price, or net asset value. Mutual funds can be purchased through a broker or through the fund company itself and typically have a minimum investment of a few thousand dollars. It’s important to note that a fund’s returns will only be as good as those of the underlying assets the fund is invested in. Mutual funds and ETFs are the vehicle for investing, but your return will be determined by the assets, such as stocks or bonds, the fund holds. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. SHARE: Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can plan for their financial futures. Lance Davis is the Vice President of Content for Bankrate. Lance leads a team responsible for creating educational content that guides people through the pivotal steps in their financial journey. Related Articles