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Millennials (those born between the early 1980s to the early 2000s) are often considered a sceptical generation, and when it comes to financial matters, particularly investments, their view isn’t any different.
It’s not surprising why, given that the majority of working millennials started their careers at the beginning of the 2008/09 market crash. According to a Capital One ShareBuilder survey, released to CNNMoney, this has led to 93% of millennials feeling less confident about investing, primarily due to a distrust of the markets and lack of investment knowledge.
As such, this impatient generation questions everything, and those who already invest despite their scepticism often try to find a way to gain the largest amount of money in the shortest space of time – a recipe that can only lead to disastrous consequences. Says Matthew Marais, Fulcrum Capital founding partner and CFP: “Millennials often trade in and out of investments too regularly because we think we know something that the market doesn’t. This leaves us susceptible to behavioural biases which often translates to buying high and selling low – not a formula for long-term prosperity.
“Millennials are very interconnected and networked, and as such, are prone to herd behaviour. In investing, the herd is often driven to get-rich-quick schemes, which can lead them to buy overpriced shares.”
Constantly trading stocks or switching between unit trusts is also known as timing the market, says Jeanette Marais, director of distribution and client services at Allan Gray.
“Timing the market is extremely difficult to do successfully because a large component of short-term returns is random and therefore inherently unpredictable. In the context of unit trusts, while some investors improve their returns by switching out of one unit trust and into another, research shows that more often than not switching destroys value.”
Another problem that plagues millennials who are already investing is that they are often inclined to purchase the most expensive shares of the best-known companies, instead of taking a more conservative approach.
When it comes to buying individual shares, it is easy to get caught up in fads and fashion, and to follow the herd, says Jeanette Marais. “But buying expensive shares can set you up for a steep fall. Rather look at shares that seem to be offered at discount.
“If you don’t know enough about individual shares, and don’t have time to do your own analysis, you may be better off investing in a unit trust. Either way, it’s important to first put a plan in place so that you know what you want to achieve, and invest accordingly,” she says.
So, how can millennials fix their attitude towards investing in order to ensure long-term wealth and greater financial independence during their later years? Says Ronald King, head of technical support at PSG: “Lack of knowledge is probably the main reason why investors invest either recklessly or too conservatively. The more knowledge, the higher the risk a client would be prepared to take and, therefore, also the higher the potential returns would be.”
According to financial experts, the most significant advice that millennials should follow is to speak to a financial adviser/planner, particularly for a well thought out financial plan.
Not only will the planners provide you with the knowledge that you need in order to better your financial health, but they’ll provide you with a guide to retire strong.
Unfortunately, the majority of millennials begin investing far too late to benefit from the real advantage of compound interest.
King advises those in their early twenties who are only just beginning their careers to start investing early. “Invest aggressively – and have the patience to let your money grow.” Only then will you be able to enjoy the true benefits of compound interest.
Says Fulcrum Capital’s Matthew Marais: “Even at an entry-level salary, keep life simple and make sure you save and invest every month. Don’t scale your life to match your growing income – peg your lifestyle and invest the balance for the future.”
This is an excerpt from an article that originally appeared in the 21 May 2015 edition of finweek. Buy and download the magazine here.
