The experiences of many millennials make them highly skeptical about investing and taking risk. This group may face large student loan debt. They’ve seen the dot-com bubble burst after the 1990s, and they’ve watched the financial meltdown of ’08-’09. Their experiences have aligned many of them with the investing philosophy of Ben Franklin. Maybe we can learn something from this group.
Investing tenants of Ben Franklin
Moneycrashers provides some great quotes from Ben Franklin regarding money and finance:
• A penny saved is a penny earned: Be disciplined about saving money over the long-term. This is the most effective way to build wealth.
• An investment in knowledge always pays the best interest: Never stop learning. This strategy helps you in your career- which is also a way to build wealth. Franklin was a lifetime learner.
• Rather go to bed without dinner than to rise in debt: This is Franklin’s message to live within your means.
Click here for Live Webinar: How To Manage Investment Costs and Risks: Mutual Funds and ETFs
Franklin’s philosophy on money is similar to the tenants of The Richest Man in Babylon– another great book I recommend.
How millennial investors view financial advice
Huffington Post has a great article on the views of millennial investors:
• Financial advisors: Millennials have less trust in institutions that other demographic groups. They have a low level of trust in financial advisors. Millennials suspect that advisors charge too much, and that their advice may be self-serving.
• Get rich slowly: Many baby boomers were interested in taking risk and building wealth quickly. Baby boomers had big wants- and wanted to pay for those wants. Millennials are more interested in a slow, conservative approach to investing. They are optimistic about their long-time future, and they’re not in such a hurry to build wealth.
• Active vs. passive management: This group leans toward using passive management as an investing strategy. This means that they prefer to buy and hold index funds. Index funds own a basket of stocks that reflect a stock or bond index. Millennials generally believe that passive management will outperform actively managed portfolios. Active managers buy and sell stocks, rather than hold a portfolio tied to an index.
These are the characteristics that define the Millennial investor.
Money managers for the Millennial investor
Not surprisingly, money managers have tailored services to meet the needs of the Millennial investor. Wealthfront is one of the most successful. Here is their basic approach:
• Questionnaire: The investor answers a series of questions about investment goals, experience and risk tolerance. All financial professionals are required to ask questions to determine investment suitability.
• Financial plan: Based on the investor’s answers, Wealthfront generates a portfolio. The portfolio consists largely of index funds using Exchange Traded Funds (ETFs). ETFs are in expensive way to invest in an index.
• Low fees: Investors are charged low fees- very low, in comparison with those charged by other financial advisors.
The goal of Wealthfront is to “personalize, diversify and rebalance”. Rebalancing means that, as the portfolio of stocks in the index changes, the index fund also changes their stock ownership. This means that the index fund will buy and sell stocks to match the index.
What about human intervention?
I’ve written in a past blog about the human intervention component. To prevent panic selling in a market downturn, don’t we need a conversation with a live person- particularly a person we have a relationship with? I guess we’ll find out in the next downturn. Maybe this group has moved beyond this issue- they understand and accept less human interaction.
Do you use a firm like Wealthfront? I’d love to hear from you.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
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Image: Ben Franklin Statue
Eric Dillalogue, (CC By 2.0)