With time on your side, make the most of it and start investing in equities now
I recently caught-up with a school friend and reminisced about old times and discussed the usual suspects – career, common friends, family, marriage, travel plans, etc. Since he too works in the startup world, we discussed various new apps/services and the industries that technology will revolutionize in the coming years.
Interestingly, even though we hadn’t met in years, our views and ideas were quite similar in many ways. US millennials have many common traits, many of which are in stark contrast to the generation that raised us. We marry at a relatively older age, are savvier with new technology, and prefer to rent rather than owning things, reports the Times of India.
Unsurprisingly, we millennials also have distinct habits when it comes to personal finance and investing. For example, most of us want to retire early and also expect to live longer than the previous generations did. Yet, a large majority has stayed away from investing in the equity markets. One of the reasons, as Accenture reports, is that “this demographic sees traditional wealth management as a bureaucracy (which isn’t unlike how they see many large institutions and industries).”
How the new generation treats money matters
Some of these trends/expectations are quite obvious, some highlight the paradoxes typical of our generation, and some of these habits are glaring mistakes that we should avoid and learn from our elders. Let’s look at what some of these trends are across the globe.
- Around 66 per cent of the millennials globally prefer to use a tech-friendly investment platform that has online support and can help with financial education, according to Accenture. Not finding such a service is one of the main reasons that keeps them away from investing
- Just as in other aspects of their life, millennials like simple investments that they understand and stay away from things they don’t. Paradoxically enough, while 65 per cent want to learn more about investing, a staggering 74 per cent admit they have neglected doing so due to time constraints. As such, despite a strong interest towards investing, many postpone it to their own detriment.
- In this regard, thematic investing has gained popularity amongst millennials, as it allows them to invest in themes & ideas they understand, claims a report from Schroders, one of the largest asset managers in the world. This is particularly true for the 25-34 age group
- We are also more aggressive in our return expectations, with more than 46 per cent millennials in India expecting returns of more than 15 per cent. Despite such ambitious targets, more than 50 per cent of the millennials have their largest allocation to cash. As a result, the bulk of the assets don’t even beat inflation, resulting in the relative loss of wealth
-When millennials do invest, we like to avoid complications. Millennials are a big driver of the push toward index mutual funds, especially in the developed markets. In the US for example, ETFs are the investment vehicle of choice for 91 per cent of millennial investors, according to Charles Schwab, one of the largest brokerages in the world. More than 95 per cent of the millennial investors also believe ETFs provide the flexibility they need to react to short-term market swings
-Accenture reports that millennials are far more likely to regularly discuss fees than older investors. And in the US, 60 per cent of the millennials recognise that passive investments present a lower-fee option to generate market returns. This is a great trend thanks to years of investor education, as fees are a significant driver of long-term returns
As a millennial, I can relate to many of these findings. Of course, it’s difficult to generalise across an entire generation. But plenty of millennials are asking the right questions and making smart financial decisions. What these statistics and findings highlight is that many millennials have stayed away from investing in equities, even though it's ideal for them.
What’s most important is that we start investing in equities. I say equities because the great advantage that youth have is time. Time is a powerful investment tool because it provides the ability to ride through the inevitable market ups and downs. Market crashes such as the one in 2008 due to the global financial crisis look completely different if viewed through the eyes of a 20-year old (investing opportunity) versus a 60-year old (major income/lifestyle change).
Let’s say that you are currently 20 years old, and will work until you turn 60, and let’s assume you can make average equity market returns of 15 per cent each year. If you invest Rs 1 lakh now and if you wait 5 years until you are 25 years, how much do you think the difference will be by the end of your retirement? The results are quite startling.
It’s likely that most of us want to retire before we turn 60, which makes it all the more important that we start early. So if time is on your side, make the most of it and start investing in equities now.(The writer is Co-Founder & CEO, smallcase Technologies)