Our Millennial Investor Series is focused on helping the younger generation understand the basic principles of money management and support them in achieving their financial goals.
Why it’s important for millennial investors to define their goals
When we go to the shops we don’t just walk up to a member of the staff and ask for a shirt. We all go to the shops with something in mind. We may need it to be a particular size, colour, quality or even something that matches our own personality or style.
Bear with me on this one as it may turn out to be a pretty loose metaphor — when it comes to fashion I really have no idea what I’m talking about. I go shopping for clothes very infrequently and when I find something that I like I buy a few of it. I often am teased by my mates because the last time I went shopping I found a grey polo shirt that I liked so I bought three of them. But hey, if it ain’t broke?
Anyway, just like shopping for each of us is a very personal experience, so too is investing.
Each of us needs to find our own strategy that not only fits our personal situation, but that we are comfortable with. A strategy that passes the ‘sleep at night’ test, which asks a simple but very important question: Are you comfortable with the decision you are making or will it keep you up at night?
Before you decide how you are going to invest and what approach you will take, you first need to define your goals.
What are you saving for?
Is it a house deposit, retirement, dream holiday, a Tesla, or even to cover costs for a soon to be new addition to the family?
What is a realistic timeframe for achieving these goals?
Is the timing flexible or is it set and unable to be moved?
The reason why defining your goals is so important is that each type of investment — shares, property, cash, bonds — has its own risks and limitations and different investment strategies will be more appropriate for different financial goals.
Major and commonly used asset classes
This includes savings accounts and term deposits.
Cash investments are the least volatile and lowest risk type of investment. They are generally suitable for investors with a shorter term outlook or those with a very low tolerance to risk. Be aware that — especially in the low interest rate environment we are currently in — the return you will receive from cash investments is quite low.
Including government and corporate bonds and other hybrid securities.
Fixed interest investments are also — in general — relatively stable investments.
For those who don’t know what a bond is, essentially it is similar to a loan in which we lend money to the borrower — whether it is a company or government — and in return receive regular interest payments over an agreed upon time period.
The returns on some bonds can be higher than what is achieved via cash, but it generally corresponds to taking increased risk. For instance, a corporate bond could result in a wipeout in the event of an insolvency.
This includes direct property investments in residential/commercial property as well as indirect investments through listed property vehicles.
Property has performed very well over the last decade. It is generally considered to be less risky than shares. Just like the share market though, property prices can be quite volatile so the investment time frame is generally suggested to be over a longer time horizon.
Be aware, though, that to invest directly in property you will generally need a large deposit and an investment is generally hundreds of thousands of dollars. If you don’t have much in the way of savings then to invest in property can often mean you are taking on a significant amount of debt — a risk in itself — and you are not particularly diversified due to limited funding to invest in multiple assets.
Also, property is less liquid than other asset classes — in other words, it is more difficult, less timely and more costly to purchase and sell property.
It’s important to note for new investors that you can also gain exposure to an investment in the property market without having to save up the significant deposit required on purchasing a property directly.
There are multiple real estate investment trusts (REITs) listed on the ASX, which give investors exposure to different areas of the property market at low cost and with far less hassle than owning your own investment property. There is also the added benefit of being able to purchase these investments with a smaller amount of total savings as well as higher liquidity.
Includes Australian and international shares.
Shares have been the highest performing asset class over the last several decades. Shares are — in general — a highly liquid investment that can be purchased at low cost and with relative ease.
Shares are considered to be one of the more risky investment types, especially for those investing over a shorter time period. The risks can be somewhat reduced through diversification — purchasing a range of companies across multiple industries and regions to spread risk — and a longer holding period.
At The Motley Fool, we are predominantly share investors, so much of what I will be focusing on in the coming articles will be on supporting investors on the do’s and don’ts of investing in shares, and ways to make money on the market.
It is important to stress that investing in shares is not a way to make a quick buck! You need to have a long term approach to protect yourselves from the inevitable volatility that will come with each investment.
So, keep the following in mind throughout your investing journey: What are your goals and what is your time-frame to achieve them?
And then allocate your savings to the type of investments that will best help you achieve those goals in a way that passes the ‘sleep at night’ test…
A note from the writer
Hi everyone. I am Chris Copley, an analyst at The Motley Fool, providing research on Motley Fool Dividend Investor, Hidden Gems and Everlasting Income.
At The Motley Fool, we are receiving more and more requests to provide support for Millennial Investors. As a Millennial Investor myself, helping younger investors is something I am very passionate about and strongly believe that with the right support and education we as Millennials have a prodigious opportunity to achieve our financial goals at an enviable age.
Each week I will release a new topic on investing principles A-Z and provide younger investors with all the basic tools they need to thrive in an ever-complicated financial world.
So follow along with me on your investment journey.
For new investors we suggest that you start from the beginning. You can follow along from our previous article here.
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Motley Fool contributor Christopher Copley has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.