Thursday, June 16, 2016

Thrifty Thinking: Investment Tips for Millennials

Hello and hope all is well!
When it comes to investing by Millennials the old adage “there’s no better time than now” really rings true. More and more Millennials continue to wonder where and how does someone who is just starting out begin when it comes to investing for their future. Millennials are faced with so many obstacles and pressures in their daily lives whether it be student loan debt repayment, purchasing their first home, planning for their children’s college plan, to ensuring they are being as tax efficient as possible when it comes to their own retirement funds. The stress is real and palpable so here are a few tips I prepared by Jordan Niefeld CPA, CFP:
·         How much money is needed to invest? 
Before you decide how much money you need to begin investing, first start by having an honest conversation with yourself and see what exactly you are trying to achieve. Ask yourself questions like:
What specific financial goals are most important to you? 
Do you have short-term financial issues pressuring you now? 
When would you like to retire? 
What am I passionate about?
This will be the beginning roadmap for your financial future.
Then I discuss the 4 bucket approach where each bucket represents its own account.
1) Operating bucket – cash for monthly expenses
2) Reserve bucket - enough cash reserves (between 3-6 months of monthly annual income) on the sideline incase an emergency arises.
3) Retirement bucket – consider putting in as much as possible into your retirement fund bucket like a 401(k) or IRA. These are tax deductible contributions that really add up over time. Considered long term until minimum 59.5 years old with no tax penalty.
4) Investment bucket – this bucket is taxable and is also consider long term but you will have the ability to tap into it for certain planned occasions.  The best way to begin funding this bucket is by setting up an automatic payment to your account each month. This will condition you to save and will be an easy thing to do to ensure your bucket is growing exponentially over time. Even if it $100 a month, start somewhere and increase from there.
After buckets 1-3 are addressed you will be ready to entertain your investment bucket #4.
“Cost of Delay” -
When trying to motivate young investors to save for their retirement and investment buckets, I use the ‘Cost of Delay’ table. This “COD” table shows how the monthly savings needed to reach a $1 million nest egg at retirement escalates the later one starts saving. The goal is to drive home the point that while it’s very easy to become a millionaire if you start saving and investing in your 20s, it becomes almost an insurmountable task if you wait.
Let’s see together…
For example, if one began to invest $213 a month ($2,600/yr) at age 20 till the time s/he reached 65, their bucket would accumulate the $1,000,000 objective (assuming a historical 8% annual return.)
However, if one would to wait till they turned 30 and started to contribute the same $213 a month ($2600/yr) they would only accumulate $450,000 (assuming a 8% return.) that’s a $550,000 difference!
To make it worse, if one would to wait till they were the age of 40 years old and contributed the same $213 a month they would only accumulate $190,000.
The “Cost of Delay” illustration really makes the point clear. The earlier we start and get serious the more you will be able to accumulate and ultimately reach your desired goals.
Here are some additional 7 tips to get started:
Every millennial investor should understand the follow points before they begin investing for clarity.
1.      Power of Reinvesting
A key to enhancing returns is the reinvestment of income. Returns decline dramatically if dividends or coupon payments are consumed rather than reinvested. If you are a millennial investor who does not need to spend dividends or coupon payments, you should consider reinvesting this income in order to maximize the growth of your portfolio.
2.      Power of Compounding
It’s easy to procrastinate when it comes to initiating a long-term investment plan. However, the sooner you begin, the more likely it is that the plan will succeed.
3.      Importance of Rebalancing
Because asset classes grow at different rates of return, it is necessary to periodically rebalance a portfolio to maintain a target asset mix. Asset classes associated with high degrees of risk tend to have higher rates of return than less volatile asset classes. For this reason, a portfolio that is not rebalanced periodically may become more volatile (riskier) over time.
4.      Dangers of Market Timing
Millennial investors who attempt to time the market run the risk of missing periods of exceptional returns. This practice may have a negative effect on a sound investment strategy.
5.      Reduction of Risk Over Time 
One of the main factors all millennials should consider when investing is the amount of risk, or volatility, you are prepared to assume. However, recognize that the range of returns appears less volatile with longer holding periods.
Over the long term, periods of high returns tend to offset periods of low returns. With the passage of time, these offsetting periods result in the dispersion of returns gravitating or converging toward the average. In other words, while returns may fluctuate widely from year to year, holding the asset for longer periods of time results in apparent decreased volatility.
6.      Returns Before and After Inflation 
Comparing the returns of different asset classes both before and after inflation is helpful in understanding why it is so important to consider inflation when making long-term investment decisions.
7.      Can You Stay on Track?
It’s easy to follow a long-term strategy during good times; the hard part is sticking with it through the bad times. What should you do if you are a long-term investor sitting in the midst of a bear down market? If you are holding a well-diversified portfolio, the answer is simple—continue to stay the course.
·         What are the best investments for young adults, especially those who are risk-averse?
The simple answer is it depends. Maintaining a well-diversified portfolio in strong, well-capitalized, dividend paying names will help reduce risk for the long term. Mutual funds, ETFs, and other diversified options offer a lot as well and may be suitable. But it is vital to understand what it is and how it works before one commits. 
Jordan Niefeld, CPA, CFP®
Team with $225 mm AUM 

Being a Certified Financial Planner™ and CPA at Raymond James, my process is simply different than the rest.  My team and I have helped individuals and businesses, locally and nationally, pursue their financial goals with thoughtful, tax-sensitive investment guidance. I am focused with the highest standards in helping you achieve your greatest objectives with simplicity, transparency and a disciplined process to measure your progress. My guidance is tailored to support your current lifestyle, retirement income needs, tax effectiveness and legacy goals, while making you feel comfortable at every step. My passion is fueled by knowing we make a positive difference in the lives of the families and organizations we serve.
Put simply, my advice is rooted deeply in my financial beliefs.
I believe two things to be almost universally true: One, that is almost impossible to be unemotional about our own finances. The second is that it is our direction and planning, not our intention and hopes, that ultimately determines our destination and purpose in any area of financial life.
I serve my clients in helping them to objectively assess where they are actually headed financially, and how that relates to their investment and tax planning goals. My advice is simple: Work with a qualified financial professional who is passionate to help achieve your financial goals.

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