Are Young People Afraid to Invest?

Investing can be an overwhelming and daunting task when you’re young and first starting out with your investments.  But are young people today turned off by investing after seeing our parent’s nest eggs deteriorate in front of our eyes?  Or do we live in a world so focused on the here and now, that planning for the distant future seems like a nonessential task.

These questions popped into my head after having dinner with an old friend that I used to work with.  Having both worked within the financial industry, we were discussing common acquaintances and severe layoffs at all the big financial firms.  As we discussed the financial woes of the industry, I casually asked her how her stocks were doing, to which she replied that her 401(k) was down.

Assuming that she had other funds invested outside her company’s 401(k), I asked her which funds she thought were doing well during the recession, and which she personally invests in, to which she responded  “none”.  Puzzled by her answer, I further inquired as to why a financial professional would have opted to keep her money out of market circulation — I figured certainly a financial professional would have a good reason for not practicing the same values that she pitched to others on a daily basis.  But her reply was surprisingly simple:  she said that she just didn’t have the time to figure out where to put her own money and had never made it a priority to find a well performing fund that she liked or to deal with researching and buying her own stock.

Here was a woman who had spent 11 years working in the financial industry (specifically, a hedge fund), and the only money that she had personally invested in the stock market was her company’s 401(k).  So why would someone under the age of 35 not invest their money when they have plenty of time to catch a market upswing?  The sheer amount of opportunities to invest means that there are options for every type of investor — from the aggressive stock picker to the passive individual who prefers to put their money in tried and true funds and let the market run its course.

The market is not something to be afraid of.  It’s a tool that, when used correctly and responsibly, can exponentially increase your wealth (as opposed to just letting your cash sit in a savings account for 30 years).

As for my friend’s case, I chalked it up to sheer negligence.  Planning for retirement is not something you opt out of for a lack of time, it’s something you take care of regardless of if you want to or not.  The only person that you can depend on to carry you through your golden years is yourself, and if you’re not responsible enough to plan now, the future will certainly bring with it a harsh reality.  Think Wal-Mart greeter after a forty year career.

So why does investing seem to rank lower on the list of importance to younger generations?  Is it the confusing, convoluted air of the industry, the intimidation that it begets or the innumerable choices between buying individual stocks and the myriad of different funds?  Is this a case of market fear or does the future seem so distant that we’re neglecting our financial plans in lieu of living for today?

Photo credit:  Mateusz Stachowski

Know Your Stuff: Breakin’ Down the Roth IRA

Investing in your retirement has never been more important than it is now. With the current state of the economy, there’s not much of a reason to have faith that you’re social security payments will provide much stability to you in your golden years. With the rising costs of living and pretty much everything else, social security contributions can’t and won’t keep up with inflation, and what may barely pay your bills now certainly won’t pay them when you’re 65.

This leads us to the following, inevitable fallback plan:  start piling up your own source of future income.  Since retirement planning is such a vitally important part of everyone’s long term plan, the government has blessed us with the Roth IRA. Keep on reading for a few basics that you need to know to get started with one:

• A Roth IRA is an Independant Retirement Account which allows you to save money for retirement by contributing a set amount of money per year and letting you earn interest through investments.
• Roth IRA’s currently have a contribution limit of $5,000 a year, considering that your earned income falls below $101,000.
• The major difference between a Roth IRA and a Traditional IRA is that you are not penalized and charged a fee if you take out your contributions (not your earnings) before you retire.
• The Roth IRA is 100% completely tax-free when you make your withdrawals after your retirement age. Kiplinger gives this startling (and inspiring) example: If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have $1.4 million saved by the time she retires at age 65. If that same 25-year-old invested that same $5,000 a year in a regular taxable account earning the same 8% return, she’d only have about $1 million after 40 years if her earnings were taxed at 15% federal. That’s more than one-fourth less money than if she’d gone with the Roth.
  

There is really no excuse against opening a Roth IRA account. It will only benefit you and it also offers this additional bonus:

• You are allowed to take out up to $10,000 tax and penalty free to purchase your first home. This is per person, so if you and your significant other both have a Roth IRA, this would give you a $20,000 limit.

To open a Roth IRA Account, you need to first decide what you feel most comfortable investing in. A lot of people choose to go the mutual fund route because it offers a more diverse portfolio (investing in many different industries as opposed to just focusing in on say, real estate). There are a few places where you can open a Roth IRA:

• A bank – this is a good choice if you want to invest in COD’s (Certificates of Deposit) and Money Market Accounts, which are less risky investments.
• A Fund Company like T. Rowe Price or Vanguard is a good choice for mutual funds because you will have a professional choosing your stocks. For these funds, you normally need around $2,500 to start, and they will usually waive the minimum if you sign up for monthly automatic deposits into your account.
• A Brokerage Firm – this is a good choice for a more seasoned investor to purchase individual stocks and bonds. Usually the same $2,500 minimum applies, but these companies tend to charge hefty fees when it comes to each trade and maintaining the account. You should always double check to make sure your fees won’t hurt you.

If you’re young, going the Vanguard route may be the way to go – you have plenty of time to increase your earnings with a much higher return compared to a traditional COD.  It’s also the best way to get a well-rounded and diversified portfolio for your money without paying huge management fees.

But if the idea of calling up an investment company is still a little daunting, set up a meeting with a financial advisor at your current banking institution.  It’s free, and they’ll be able to set you up quickly with an IRA account or at the least, give you a sampling of helpful information to get you started on the right path.

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