Despite younger generations typically being perceived as more comfortable accepting a higher level of risk, millennials often adopt a cautious approach when it comes to money matters.
According to research carried out by Barclays in conjunction with global business intelligence provider RFi Group, millennials tend to put their money into current accounts, rather than looking at alternative ways to save and invest their money.
However, with the Bank of England base rate currently at a record low of 0.25%, cash accounts often provide the lowest returns. Even so, almost half (47%) of those aged 18-24 prefer to put their money into a current account, with only 5% of this age group opting to invest.
Older millennials, those aged 25-34 are more likely to invest than their younger counter parts, with nearly one in five (18%) having some investments.
Barriers to investing
This is perhaps not surprising given their stage of life, as it’s important to build up some cash savings before considering investing in stock market based investments. However, millennials cite several other reasons for not investing, in addition to not having enough spare money to do so.
Over a third (40%) of those surveyed for Barclays claim that not knowing enough about investing is one of the biggest barriers that stops them from giving it a go, while 31% aren’t comfortable with the level of risk involved. A similar number (27%) say they fear losing everything.
A separate study by global asset managers Schroders found that millennials have a bias towards short-term investing, only looking to hold their investments for just over two and a half years.
This is often because they are investing for immediate financial requirements, such as a deposit for their first home, or to help meet monthly mortgage or rent payments.1 In comparison, investors aged 36 and over look to hold their investments for 5.4 years on average.
The same survey found that investors aged 18 to 35 placed as much importance on environmental, social and corporate governance factors as investment outcomes when choosing their investments.2
Tips for millennials looking to save and invest
Over the longer term, stock markets tend to perform better than cash so it’s important for millennials to consider investing, particularly for medium to long term financial goals – those at least five years away. That said, the way that investments have performed in the past is not a reliable indicator of how they will perform in the future.
However, investing won’t be suitable for everyone and much depends on your existing financial situation and attitude to risk. Investments can fall in value and you have to accept that, no matter how long you hold them, you may generally still get back less than you invest.
The advantage you have if you’re a millennial, is that time is on your side, particularly when it comes to things like retirement, so if you invest and stay invested, you should be able to ride out stock market ups and downs and hopefully achieve better returns than if you just kept all your money in cash.
But before investing, it’s important to try to clear any outstanding debts first.
You also need to ensure you have some easily accessible cash savings in case of emergencies, such as the boiler breaking down, or a change in circumstances, say you or your partner loses their job.
If you feel you’re in the position to consider investing, it’s possible to get started with relatively small amounts – you can invest as little as £50 a month. This can be a great way of trying it out without committing too much money. Then as your confidence grows or your financial situation improves, you can always increase the amount you invest.
Investing monthly is also a good way of diluting some of the risk and taking the emotion out of investing, as it removes the worry of whether or not you’re buying into the market at the right or wrong time. I explore this in more detail in the April episode of ‘Smart Investor with Clare Francis’.
Where to invest
So once you’ve decided you’re ready to invest, where do you put your money?
If you buy shares in a single company, say Tesco or BP, your returns are dependent on how that company performs. And even if it is a large, well known brand, this can be higher risk than investing in a fund such as unit trusts, open ended investment companies (OEICs), investment trusts and Exchange Traded Funds (ETFs).
A fund can help spread risk because your money is spread across a wide range of shares, bonds and other assets, which are chosen and monitored on your behalf by professional fund managers.
Tracker funds can be a good option for those looking to invest for the first time. A tracker fund gives you exposure to shares in all the companies within a specific stock market index, such as the FTSE 100. These funds, often known as passive funds, follow the index they’re tracking so it’ll never beat the market but it won’t underperform either, which is one of the risks if you invest in an actively managed fund or buy shares in a few companies.
When a fund is actively managed, the fund manager picks and chooses investments, with the aim of delivering a performance that beats the fund’s stated benchmark or index. However, there are no guarantees that even the most talented fund manager will pick investments that will outperform on a regular basis.
If you go for a tracker fund, there is no fund manager making investment decisions so the charges tend to be lower than they are on managed funds.
Make the most of annual allowances
The Personal Savings Allowance (PSA) allows basic rate taxpayers to earn up to £1,000 in interest each year tax-free, and higher rate taxpayers up to £500. Additional rate taxpayers do not have a Personal Savings Allowance.
There is also a Dividend Allowance which means you don’t have to pay tax on your first £5,000 of dividend income (plans to reduce this to £2,000 from April 2018 have been shelved due to the general election but are expected to be reintroduced). Basic-rate taxpayers must pay 7.5% on dividend income beyond the £5,000 annual allowance, higher-rate taxpayers pay 32.5% and additional-rate taxpayers pay 38.1%.
Your annual Individual Savings Account (ISA) allowance remains important despite these allowances because if the rules don’t change they will protect assets from tax over the long-term, enabling them to grow free of income tax, tax on dividends and Capital Gains Tax (CGT). You can put up to £20,000 in an ISA in this tax year (which runs until 5 April 2018).
Your allowance can be invested across cash, investment, and Innovative Finance ISAs which invest in peer-to-peer lending; or you can put up to £4,000 of your allowance into the new Lifetime ISA (LISA), which is available to those aged from 18 up to 40, and designed to help those looking to get on the property ladder, save for retirement, or both. LISAs can hold cash, stocks and shares qualifying investments, or a combination of both.
Remember that tax rules can and do change, and their effect on you depends on your individual circumstances, which can also change.
Invest for the long-term
Investing won’t be right for you if you’re going to need your money in the next couple of years.
You should aim to remain invested for at least five years, but preferably longer, as this should hopefully give your investments enough time to recover if there is a market downturn. As a millennial, time should be on your side, so hopefully you will have several years to go before you need your money.
Of course, there are no guarantees – investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.
If the main barrier to you investing is lack of knowledge, seek professional financial advice from someone who can guide you through the available options and help you choose the right investments to suit your needs.