5 Investment Tips for Millennials, Ready Towards Financial Freedom
Investment is a topic that cannot be separated from the life of modern society, especially the millennial generation. Check out 5 basic investment tips so that you are ready for financial freedom.
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| 5 Investment Tips for Millennials, Ready Towards Financial Freedom |
The investment guide is one of the new lessons for the millennial generation, which is known to have dominated up to 80 percent of the total 4.6 million Indonesian investors by the end of 2020. The Financial Services Authority (OJK) said that the movement of the capital market now looks more dynamic in line with the increasing number of equity investments. in the capital market filled with millennial investors.
With an initial capital of IDR 100,000, millennials can already buy shares on the Indonesia Stock Exchange (IDX). Investment planning, both short-term and long-term, must be understood by millennials before making a decision.
Before that, millennials need to know and learn the ins and outs of investing. Check out some of the basics of investing and why it's important to start investing, as reported by Bank Rate on Thursday (24/3/2022).
Why is it important for millennials to invest?
“The worst thing you can do in your mid-20s to mid-30s is not save money and invest. If you invest money early, it gives your money a long time to grow,” said Mike Kerins, founder and CEO of RobustWealth.
He said that despite the ups and downs of the market, it is rare for the stock market to stay down for a long period of time. Stock investments provide greater returns than cash and bonds in the long run.
Money stored in savings accounts is stagnant and even eroded by rising inflation. Meanwhile, stock market investment may increase over the years.
Further, large cap stocks returned about 10 percent compounded annually from 1926-2020. Over the same time period, long-term government bonds returned only about 5.5 percent annually and T-bills returned about 3.3 percent annually.
“The surest way to build wealth over the long term is to invest in a diversified portfolio of common stocks,” said Robert Johnson, professor of finance at Creighton University and CEO of Economic Index Associates.
Another advantage of investing money over time is that it creates a snowball effect. In his opinion, millennials need to start merging early and let the merger work patiently for decades," Johnson said.
Compounding a portfolio means that when you earn interest on an investment, you also earn interest on something else. This allows you to build bigger and bigger balances over time, even without any additional capital investment.
Over the years, you'll get a much bigger return than if you just kept the money in a savings account or hid it under the mattress.
5 Basic Investment Tips for Millennials
1. Risk Tolerance
Before making your first investment, it is important to understand your risk tolerance. This refers to your ability and willingness to handle investment losses, which may be temporary or permanent.
While the stock market tends to go up in the long term, this type of investment can and has suffered a severe downturn over a shorter period of time.
You'll want to think about whether you have the guts to hold out during the downturn, or if you might be better off in a safer investment.
2. Asset Allocation
As you develop and build an investment portfolio, you must determine how much to allocate to stocks versus other assets, such as bonds or real estate.
Assets can be even further broken down into categories based on geography, investment style, or type of company.
It is likely to shift from mostly risky assets early in your investment life to safer assets as you enter retirement age.
3. Active vs Passive
Another important decision you need to make is whether you want to be a passive or active investor. Active investors try to beat popular market indexes by investing in companies they think will outperform.
Passive investing, sometimes referred to as index investing, seeks to match the performance of a broad index and is available to investors at very little cost. These cost savings generally mean that passive investors have outperformed active investors over a long period of time.
4. Diversification
Simply put, diversification is the financial equivalent of the old adage, “Don't pull all your eggs in one basket.”
By implementing diversification, you spread your assets across several different assets, realizing that some will do well and others will perform poorly. The broad diversified portfolio has performed well over time.
5. Time Horizon
Knowing your time horizon is an important step in any financial plan. Identifying your primary goal, whether it's saving for retirement or your child's education, will have a huge impact on how you invest.
Long-term goals (at least another five years) will usually result in long-term assets, such as stocks. Short-term goals such as saving for a down payment on a home would be better served by investing in safer assets, such as a high-yield savings account.