But the young investors who are jumping into the market are choosing very different stocks than their parents are.
In an exclusive analysis for CNBC.com, online portfolio manager SigFig examined 410,000 portfolios for 220,000 investors who had at least one stock holding. They identified which stocks were most likely to be owned by millennials compared to baby boomers, and vice versa. Turns out the two generations not only favor different companies, but different sectors, as well.
SigFig researchers found millennial investors are most likely to own stock in Advanced Micro Devices, SolarCity, Twitter, GoPro — andTesla, which they’re 2.7 times more likely to own than boomer investors. Boomers, meanwhile, tend to favor larger, well-established companies. They are more than five times more likely than millennial investors to own shares of Southern Co., an electric utility company, and about five times more likely to own shares of Honeywell, Duke Energy, Merck and Mondelez, a multinational food and beverage conglomerate.
Why the disparity? Age explains a lot of it. For one, millennials are in the accumulation phase, said Marla Mason, a certified financial planner and vice president of the Colorado-based brokerage firm America’s Retirement Store. “They are looking for growth,” she said. “They are not necessarily looking for their grandfather’s portfolio of large blue-chip, dividend-paying stocks and bonds.”
Millennials are also more likely than their parents to pick stocks based on familiarity, looking at companies that produce products they use, she added. That hasn’t paid off in the short run; year to date, the boomers’ stock picks have outperformed the millennials’ favorite stocks. (See video.) But millennials do have more time to ride out the market’s ups and downs.
Still, if you’re a young investor, there are additional steps you can take to improve your chances of long-term financial success.
1. Get your finances in order. Before you even open an investment account, make sure you’ve paid off any credit card debt and that you have money set aside in a savings account in case you get hit with unexpected expenses or a job loss. Aim for enough to cover about three to six months’ worth of expenses.
“If you don’t have that money set aside first, then it really doesn’t make sense to put money aside in the markets,” said certified financial planner Charles Bennett Sachs of Private Wealth Counsel in Miami.
2. Fund your retirement account first. Before you open an investment account, make sure you’re taking full advantage of the benefits of tax-advantaged retirement accounts. Focus on maxing out your employer-sponsored plan before opening a regular investment account. For 2015, you can contribute up to $18,000 in your 401(k).
At the least, make sure you’re contributing enough to get any employer match available to you. “If your employer matches, you want to max that out because you won’t get that kind of return with the stock market [alone],” said Zach Abrams, manager of wealth management at Capital Advisors in Ohio.
If you don’t have access to a 401(k), you can contribute up to $5,500 this year into a Roth IRA or a regular IRA. A Roth IRA lets you grow your money tax free, but you do pay taxes on contributions. With a regular IRA, you’ll be taxed when you start taking money out, but you won’t pay taxes in the meantime on annual gains.
3. Keep costs down. If you have money left over to open an investment account, try to make sure you’re keeping as much of your money as you can. Look for brokerage firms that have low commissions and low fees like Schwab, Vanguard, TD Ameritrade or Fidelity. Just make sure you are aware of all the fees associated with the funds you’re investing in, as well as trade commissions and any expenses associated with managing and maintaining your account. “Commissions can start eating you up,” warns Abrams, especially if you trade a lot. So it’s important to factor that in.
You could also try a roboadvisor service such as Wealthfront or Betterment. Neil Waxman, managing director at Capital Advisors, said this can be a good solution for a young investor because it is “low cost and you won’t have to do the research on your own.” The services offer fund suggestions based on your risk level, goals and timeline. The trade-off is that you have somewhat less flexibility with your investment choices.
4. Diversify. While you have time to ride out market volatility if you’re young, you still want to be sure you’re comfortable with the amount of money you’ve invested in particular stocks. “If you can’t commit that money for five years, it shouldn’t be in at all,” said Sachs. Ask yourself how long you plan to invest, how much realistically you can afford to invest and how comfortable you are with risk.
One way to lower your overall risk is by diversifying your portfolio, not just by investing in different stocks, but by considering different types of assets like CDs or bonds.
Whatever you choose, advisors recommend you do your research on the stocks or funds you invest in, checking analyst reports and ratings, and invest a little at a time so you can get a sense of your tolerance for risk.
“Keep it simple … as you start out,” said Sachs. “Get started and get in the habit and then you can start working toward more complex investing.”