Broke Millennial Takes on Investing

by Erin Lowry

  “What goes up must come down. That’s a theory in all aspects of life, and that is what’s going to happen to the market,” says Kelly Lannan, director, Fidelity Investments. “Can we tell when the market is going to go down? No, we cannot do that, and if we tried to time it, we’d drive ourselves crazy and miss out on a lot of opportunities.”

  Be Wary of Dramatic Headlines

  “Worst Decline in History!” and other flashy headlines may be excellent clickbait, but they’re terrible for the novice investor’s constitution. Besides, such headlines provide little to no context. We saw a few market corrections in 2018. It was easy for news outlets to vie for your eyeballs by writing things like “The Biggest Point Decline in History!” While true, the statement didn’t provide context that the Dow Jones Industrial Average had set a highest closing record at 26,616.71 on January 26, 2018.7 So, when it “went into free fall” and “plunged” (words actually used in articles) the following week, it was still higher than it had been just five weeks prior, in December 2017.

  Know What’s Going On in the World

  The market reacts to what’s happening both nationally and globally. The day after the United Kingdom voted to leave the European Union, a vote more commonly known as Brexit, it wasn’t just the UK market that soured; our stock market had a dip as well. Generally, any sort of uncertainty will disrupt the market at least a little bit because people get nervous.

  Just Wait a Day

  If the market does start to take a tumble, consider waiting a day, advises Colleen Jaconetti, CFP®, senior investment analyst for Vanguard Investment Strategy Group. “Just try to think through ‘Why am I going to do this?’ because the hard part is you have to make three decisions: when to get out, when to get back in, and where to invest in the meantime. Getting all three of those right can be very difficult.”

  Turn to the Past for Comfort

  It may seem crazy that I’ve just spent several pages overviewing awful times in the market, but hopefully that knowledge will actually help you weather the storm of a market crisis. Remember the opening story of this book, when my dad explained to me that the market is a cyclical beast?

  Lannan also advises taking a different approach, especially if pure storytelling doesn’t help you. “Looking at visuals over time and charts—especially if you’re a visual person—you can actually see what can happen to your money, even through downturns.”

  Speak to Someone

  Get your advisor on the phone, if you have one, or even just talk to someone you know with some investing experience, whether that’s a peer, parent, or coworker. Preferably go to someone with a higher risk tolerance than you, who isn’t going to Chicken Little the situation and recommend that you “Sell, sell, sell!” or “Stuff all your cash in a safe and never invest again!” It’s never a bad move to speak to a seasoned investor who has actually weathered some of the more significant bubbles or market crashes over the years.

  Honestly, Just Don’t Look at Your Portfolio

  “I have to tell you, through the financial market crisis [of 2008], I didn’t open my statement at all,” admits Jaconetti. “I knew I wasn’t going to like it, I wasn’t going to be happy with it.”

  It’s okay to be informed, to know what’s going on, she says, but that doesn’t mean you need to look at your portfolio and see the temporary damage being done.

  Stick to Your Plan

  One reason Jaconetti didn’t need to look at her portfolio is because she’d put a plan in place and knew how important it was to stick to it. “People who did get out [during the 2008 financial crisis]—it took them years to recover,” says Jaconetti. “If you got out of the market and went all to bonds or all to cash, the break-even was more than five years. If you’re getting out at the bottom or close to the bottom, you don’t know when to get back in. If you didn’t get back in as it was going up, and it just kept going up, you missed a very significant bull market after that. Hindsight is always 20/20. No one knew when it was going to hit the bottom or turn around, so really have a long-term focus. The more important thing: have the right asset allocation, be diversified, have low-cost funds, and then try to tune out the noise, knowing you have a plan.”

  Don’t Sell . . . Usually

  Remember the story in chapter 3 about my professor and her neighbor? The moral of that story was that you don’t really make or lose money until you sell. You lock in your losses when you sell. The general advice when you have a well-balanced and diversified portfolio is to not sell. Of course, if you’re doing individual stock picking and a company is without a doubt going under, or if you’ve invested in a highly volatile commodity, that’s a slightly different situation.

  Remember Your Time Horizon (and That You’re Young)

  Because this book is written for Millennials, I’m guessing that you’re on the younger end of the spectrum. Maybe you’re not! But if you have decades until retirement, when you’ll need access to some or all your investments, then take solace in the fact that time is on your side.

  “The biggest strategy is make sure you understand that you’re young,” says Lannan. “You can weather the ebbs and flows of the market. Never try to time the market, and just stay consistent with your strategy. When you get closer to certain [milestones], that’s the time to rebalance. Don’t do it before you need that money because you shouldn’t react to anything. Fight against your human nature a little bit.”

  Consider Investing More, or at Least Leave Your Automatic Contributions Alone

  “If your favorite car went on sale, wouldn’t you go buy it?” jokes financial education specialist Ashley Fox. “You wouldn’t be scared of it. It’s just going on sale. If you truly believe the value of that car is worth having, and over time will have greater value than what you paid for it, then by all means, that’s the time you rack up.”

  Granted, a car might not be the most relevant metaphor here, considering that cars depreciate in value, but Fox makes a sound point. It may sound absolutely nutters to you, but you do want to keep on your steady path of investing during a downturn. That is not the time to stop your automatic contributions or take your dividends in cash. (You’ll want to reinvest them, if you can.) In fact, some people would even argue that it’s a good time to put in a little more.

  The logic behind this is that the market is essentially providing you with a fire sale. Stocks are cheap because share prices have gone down, so you get more bang for your buck. It’s part of why the system of dollar-cost averaging is highly recommended. If you keep those automatic contributions going, you’re buying during a low-cost time, which helps offset your buying in toward the top of the market.

  CHECKLIST FOR HANDLING THE PANIC OF A MARKET CRASH

  The market is going to go down. It’s a fact all investors must face. So, here’s what you need to remember when it happens.

  ☐ Stay calm and remember your investing strategy.

  ☐ Take some solace in looking at the market’s history.

  ☐ Don’t turn off your automatic contributions.

  ☐ Take a day before making a rash decision.

  ☐ Check in with a trusted friend, mentor, or financial advisor.

  ☐ Seriously, just avoid looking at your portfolio.

  Chapter 12

  Sniffing Out a Scam

  READING OVER COMMENTS from my editor, I noticed a question buried within the text: “Does he really pay this much for a life insurance policy? That seems like too much.”

  The question was about my then boyfriend, now husband, Peach. At the time, he was paying around $50 per month on his $50,000 life insurance policy. This was something I didn’t know about until I wrote an article detailing why it’s important for people with cosigned private student loan debt to carry life insurance. (Answer: because if your lender doesn’t discharge the debt upon death, the cosigner will suddenly need to pay it off and may not have the fund
s to do so.)

  I’d told Peach a few months prior that he really should have a life insurance policy, since his parents had cosigned on some of his student loan debt. It wasn’t a long conversation by any means, and I didn’t even know he’d been proactive about getting himself a policy until a few months later, when he mentioned paying for it. I didn’t ask any questions about where he’d gone or the type of policy he’d picked.

  Smash-cut back to me reading my editor’s comment.

  I started mulling over his point. Why was a twenty-five-year-old with no health issues paying $50 per month for a simple life insurance policy?

  So, I asked Peach. “Hey, what kind of life insurance policy do you have?”

  Then I got the answer I feared: whole life.

  “Oh, how come you picked whole life insurance?”

  “I don’t know,” he said. “I googled ‘How to get a life insurance policy’ and ended up on the insurance company’s website. When I called and explained my situation, the woman on the phone told me that a whole-life insurance policy would be best because some of the money is invested and I get the cash value back. With term life, she said I’d never get money back except if I died, and then my parents would get the payout.”

  He’s right. It is a good sales pitch. It makes sense that lots of people get pushed into a product like whole-life insurance, even when it’s not the best fit. For Peach, a whole-life policy made no sense. He didn’t have any dependents, wasn’t worried about sheltering money from estate taxes, and just wanted some basic coverage in case he died young and his parents were forced to pay off his student loans. A term life insurance policy would’ve been the perfect fit, about $25 a month cheaper with a larger payout. That’s an extra $25 a month that could’ve been going toward paying off his student loans faster. The problem was that the insurance company rep on the other end of the call probably received a commission when he signed up for a whole-life insurance policy, which means she was incentivized to push him toward one.

  After I explained these points, Peach ended up switching his life insurance policy. He nearly tripled his coverage, to $150,000 for a seventy-year term, and saved $25 a month, which meant putting about $300 a year back into his budget. That’s an extra student loan payment!

  Now, was he scammed? Not exactly. But he also wasn’t encouraged to get the financial product that fit him best.

  * * *

  • • •

  UNFORTUNATELY, a big part of investing is being cautious and developing an excellent bullshit detector. There will always be scams in the marketplace, so let’s overview ways to detect a scam, using more than just a gut instinct, and how to properly vet potential investments and advisors.

  WHAT THE EXPERTS HAVE TO SAY

  With the exception of my first foray into investing (when I called up an advisor at my bank and was sold a particular mutual fund), I’ve pretty much spent the bulk of my DIY strategy vetting products myself and focusing on low-cost index funds. I’ve only once purchased an individual stock for the purpose of playing around and learning more about stock picking. I do my best to block out the noise of the hot new stock tip or latest buzzy trend while still keeping myself in the know for the sake of my work and my investing plan.

  But I’m human. Of course I’m susceptible to wondering if I should’ve invested a little money in Bitcoin back when I first started hearing about it, or listened to my gut and bought Netflix stock back at the end of 2011, when shares plummeted, since I was pretty sure the company would stick around. (Yeah, I still kick myself over that one—but I wasn’t in a financial position to invest yet.)

  I asked the experts for recommendations on how to sniff out a scam in the investing world and for tips on how to realize that a particular company or investment isn’t the right fit.

  “Keep It Simple, Stupid”

  “There are a lot of people who buy stuff because it’s sold to them,” explains Jill Schlesinger, CFP®, CBS News business analyst and author of The Dumb Things Smart People Do with Their Money. “They don’t buy it because they understand it. I had a fabulous professor once. He was teaching a big class on options to us young commodities traders, who were trading derivatives. On the blackboard, he wrote in huge letters, ‘KISS.’ And I thought it was going to be some massive theory about [the] Black-Scholes model, and he’s like, ‘Keep It Simple, Stupid.’ And that’s not a bad way to think about your own financial life. If you can’t very clearly explain what you just bought, then don’t buy it. And look, you know when you’re being sold and you know you’ve got a sixth sense. If there are yellow flags that you’re feeling, then don’t do it.”

  “Quick Money” Can Be Code for “Shady”

  “Well, gut check, I think, is a good word,” says Maria Bruno, CFP®, a senior investment analyst for Vanguard Investment Strategy Group. “If it seems too good to be true, then it probably is. So, be careful of gimmicks or strategies that are meant to make quick money, because those are often probably not realistic or just riddled with a lot of shady investment activity.”

  Choose Advisors/Investments That Share Your Values

  “Do your homework on investment providers,” says Bruno. “Look at tenured investment firms. Make sure that how that company invests is aligned with your values. You know, a lot of people spend a lot of time thinking about a car and all the work that goes into purchasing the right car. Well, do we as investors spend that much time thinking about what fund we’re going to pick? Maybe not, but think it through and understand what you’re getting, what you’re paying, the tenure of the firm, and the money manager.”

  Know Your Risk Tolerance

  “Take a look at the asset management companies out there,” advises Douglas Boneparth, CFP®, founder of Bone Fide Wealth. “These are big names with trillions of dollars. Your BlackRocks, your Vanguards, your Oppenheimers, your Goldman Sachs[es]—they sell mutual funds or ETFs. Because the space is so commoditized, you’re going to be hard pressed to find yourself in a Bernie Madoff situation. You’re well covered, the industry is well regulated—you’re not going to have a ‘burn ’em, cheat ’em, and run’ mutual fund or ETF.

  “You’re going to find products at large institutions that run the gamut from conservative money market funds to relatively risky emerging markets. You’ll find funds that are investing in cryptocurrency and private equity companies. We’re going well beyond the spectrum of your large US companies.

  “But where should you be concerned about sniffing out someone? [Not from the mutual funds or ETFs that the established and regulated asset management companies are offering.] When your buddy comes up to you with a wild idea and wants your cash.

  “Financial institutions come to the table with well-regulated products. The consideration is where does that product fall on the risk spectrum, not that you’re going to get robbed.”

  Buy More of What You Already Own

  “I don’t research the next big tech company,” says Ashley Fox, a financial education specialist who started her career working for a Wall Street investment bank. “If I use it, I own it. That’s how I invest. I don’t go looking for investments. I just buy more of what I own and continue to use. I understand how each company I invest in operates and makes money and what they do.”

  Were Your Questions Answered?

  “There should be an immediate red flag when someone tells you about an investment and you ask questions about it and you’re not satisfied with the answer,” says Jennifer Barrett, chief education officer for Acorns. “You still don’t feel like you understand it. That’s my gut check.”

  Are You Okay with Losing All the Money?

  “Even with cryptocurrency, I really researched it for quite a long time before I invested in it,” says Barrett. “My personal gut check is I cannot invest in anything unless I at least understand the basic mechanics behind it. With crypto, that means understanding that it’s largely a speculative inve
stment and you’re betting that someone else is willing to pay more than you. So, how comfortable am I putting money into an investment that has no real intrinsic value, solely on the hope that someone else will pay more? My answer was: I’ve been watching this for long enough that I can put a little money in, that I’m okay losing with the idea that I might win big. But if I lost everything I invested in it, would it fundamentally affect our ability to reach our goals? How would I feel? Would I be okay if that money just disappeared?”

  VETTING FINANCIAL ADVISORS AND PRODUCTS

  There are a number of resources out there to help you sort out whether an advisor is sketchy.

  BROKER CHECK: The Financial Industry Regulatory Authority (FINRA) offers an online tool that allows you to vet a potential broker/investment advisor. Broker Check allows you to look up a financial advisor by name, Central Registration Depository number, or firm name. This free tool will tell you the number of years the advisor has been active, which exams he or she passed, and the states in which he or she is registered. Most important, it will let you know about any customer complaints, regulatory actions, arbitrations, bankruptcy filings, and criminal or civil judicial proceedings. If your potential (or current) investment advisor or broker isn’t registered, it could mean he or she isn’t legally allowed to sell securities or offer investment advice.