Advice for the Millennial Investor: Part II
In Part I, we discussed building the habit of saving a portion of your income for investment purposes. Now it’s time to explore what to invest in – I will discuss traditional and alternative investments for the long-term (retirement). As well as building an experiment fund, separate from your long term investments that you can play with.
There are a ton of myths, misconceptions, and just plain bad advice on traditional investments, but I’ll skip all the boring details and just bottom line it here.
- Costs like fees and taxes can have a significant negative impact on the returns of your investments over the long run.
- Many 401(k) plans offer a selection of actively managed mutual funds as investment options, these funds can an expense ratio of 1% or higher, in addition to other fees associated with the 401(k) plan.
- Over the course of 40 years, a 1% fee can compound and 25% or more (potentially hundreds of thousands of dollars) of your investment can be lost.
- Over 80% of these actively managed mutual funds underperform the market (S&P 500).
- Many financial advisors are given financial incentives to push certain products that might not be in your best interest, and most are actively managed mutual funds. Plus these advisors may be charging you a percentage of your portfolio to manage it. Again, adding to the fees that dig into your returns.
- Picking your own individual stocks and managing your own portfolio is time consuming, can expose you to losses, and have tax implications. If 80% of managers that do this day in and day out for a living can’t beat the market, realistically what are your chances?
- Taking losses sets you back big time because now you have to make a large enough a return just to get back to even – which takes away from the time that money can be growing.
So if much of the traditional advice isn’t optimal for most people, what is the solution?
The solution is to invest in low cost index funds such as the S&P 500 that have expense ratios as low as 4/100 of a percent. The key is to invest regularly (i.e. monthly) in this index fund and don’t sell until you approach retirement. When the market takes a down turn double down and invest more money during that time.
This is wise because while everybody else is panicking and selling their positions, and sometimes losing money or incurring high amounts of capital gains tax, you know that the S&P 500 will rise again and have nothing to worry about.
Warren Buffet is such a big believer in this strategy, that he is investing 90% of the money he is leaving his wife in an S&P 500 Index Fund.
Alternative investments are investments that aren’t found on Wall Street, and often not directly tied to the financial markets. These investments include real estate, private mortgages, precious metals, privately held companies, limited partnerships, intangible assets, and more.
Alternative Investments often offer higher returns, sometimes well over 20%, compared to the average 9.7% of the S&P 500, tax benefits, direct contact with those managing the business, and most importantly they aren’t directly tied to the financial markets, which can take swings that many never see coming.
Since these investments aren’t publicly offered like traditional investments, you won’t hear about these much in the news or at all from your financial advisers. The issue for most people will be finding and building the relationships with the right people to invest their money with.
Fortunately, if you are reading then you may be happy to learn that my company Babylon Property Group assists investors looking to invest in the alternative asset class of multifamily real estate. You can feel free to call or email me anytime if you would like to learn more.
Now with these investments you cannot invest in them as regularly because they often require a larger investment. What you have to do is save this money in a savings account or CD until you accumulate at least $15k before making an investment.
The Experiment Fund
The experiment fund is a stash of money you allocate towards speculation. This fund is separate from your long-term investments and it is important to prioritize your long-term investments and add to them regularly before worrying about your experiment fund.
Your experiment fund is your chance to play around. It’s where you can day trade, volatility trade, take that bet that XYZ Company will beat their quarterly earnings, make a killing in options, or believe that you found the next Netflix, etc.
If your hunches are right and you make a nice chunk of change playing around in this account, great! Take a nice vacation, buy a car, put the entire gain into the next play, do what you will with it.
However, most importantly, if you take a loss, it will not set your retirement fund back. The odds of you taking losses are much higher when you are speculating (or even when you believe you are 100% right), and that is exactly why you separate this from your long-term investments.
The Bottom Line
To avoid high costs and potential losses that eat into returns, the majority of investors should regularly invest a portion of their long-term investment dollars into to a low cost S&P 500 index fund. Then allocate the rest towards alternative investments to diversify outside of the financial markets. How much to allocate to each area will be different based on each investor’s situation.
After this, if you still feel the urge to play around then create an experiment fund completely separate from your long-term investments and play on.[/vc_column_text][/vc_column][/vc_row]
If you are interested in learning all the details on why investing in low cost index funds are the best option for most investors, take a look into Unshakable by Tony Robbins. I highly recommend it.
You can learn more about investing in alternative assets such as real estate by visiting Babylon Property Group’s website or by contacting me directly at 631-253-1609 or email@example.com