July 17, 2024

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Investment Strategies for Millennials: Balancing Risk and Reward

4 min read

These millennials and Gen Z are rife with both challenges and opportunities for investment, moving with an eclectic approach to their finances and leveraging technology to create a bridge between the knowledge generation and the wellness generation.

This is why the stock market is the best available type of investment vehicle as it has a form of ownership stakes in companies, while at the same time offers great opportunities for capital appreciation and dividends. A young investor has the distinct advantage of having more time under the same exposure to the movement in the market, the risk is smaller.

Diversification

Diversifying your portfolio lowers your risk. A well-diversified portfolio holds assets that respond differently to market fluctuations, which means that the portfolio returns barely any movement in these markets.

Millennials will have the best chance of staying with the optimal asset allocation or investment strategy if they account for their time horizon and their risk tolerance in their asset allocation strategy. Time horizon means length of time before the money is needed and it plays a crucial role in all strategies.

Firstly, all the advantages of compound returns go to those with longer time horizons – with compounding interest, your interest earnings earn interest and compound over time, increasing their yield, allowing you to earn more money than you would have otherwise. So, young investors, start early and stay consistent. A great way to do this is by working with a financial adviser to create a plan, and to diversify your investments. Young people, I would encourage you to look outside of traditional avenues.

Long-Term Assets

The investment of “non-current assets” is also a distinctive component of their long-term financial plan for millennials. Such assets include bonds with one-year maturity, property, plant and equipment (PP∧E), intangible trademarks or patents, and so-called “deferred charges”.

A rudimentary investment decision process framework consists of defining an investor’s goals; gathering data and information; and allocating capital among one’s chosen asset pools. Gen Z grew up with the internet, thus gaining access to data and information instantaneously, as well as to many different commission-free trading platforms that allow individual investors to save money when putting capital to work, sometimes at the expense of having to entertain and gaze aimlessly at LinkedIn.

But for millennials, who have higher levels of debt than earlier generations, the most important lesson is to start saving and investing (even at a low rate, 2-3 per cent, is better than nothing). For this group, savings and investments can help to take advantage of the magic of compound interest over the long term: investing small amounts regularly over your lifetime (eg, $1,000 a year) will allow you to invest at a single point, say $50,000. If invested with 5 per cent interest per year (equivalent to around 7 per cent after inflation adjustment), you will have accumulated a big sizeable for retirement or for other objectives by the time you reach your 60s.

Investing in Real Estate

As they watch those same boomer parents struggle to prepare for retirement, more millennials are seeing real estate as an attractive way to diversify their portfolio and build a secure asset.

As millennials also began buying homes, they clearly saw the value of real estate investing, especially a way of accumulating equity and investing in something that’s real and reasonable to manage, not to mention the way it supports sustainable living practices. Meanwhile, property investors have a lot of tax breaks available to them under the tax code, and multifamily is a particular gem due to all the tax breaks.

In terms of investments, such as the stock market, millennials don’t like to take big risks. At most, they will enter into the market with the lowest risk available and slowly build up their real estate portfolio throughout their lifetime. The ego-mind, however, can only take so much. Once millennials have acquired a little bit of comfort in these approaches, a few years may be enough, they may likely decide to consult an advisor when looking for risk management strategies that they’ll feel comfortable in, based on their financial goal.

Alternative Investments

Risk management is an integral part of investing. In order to achieve optimal levels of risk and reward, it is important for an investor to conduct a comprehensive analysis and investigation into factors such as financial goals, investment timeframe and risk appetite.

Generally speaking, the longer your investment horizon, the more risks you can afford to take, your investments more time to recover from dips and downturns in the market. But this all depends on your psychological strengths — namely, your ability to stay calm and deal with the stress and anxiety that can come with investing.

Alternatives can be an effective way to diversify and potentially enhance returns, as many alternatives have low correlations with traditional asset classes including stocks and bonds. Alternatives may also give investors access to emerging industry companies with high growth opportunities or allow you to invest in other cutting-edge companies at the forefront of new industries or niche fields. Additionally, alternatives can complement traditional equities and bonds in a portfolio and enhance performance. Like all types of investing, investing in alternatives entails significant risks, which investors should be wary of before taking action.

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