This is the ‘biggest mistake’ young investors make, Josh Brown says
Josh Brown.
Danielle DeVries | CNBC
Investing can seem daunting for beginners.
About 21 percent of Americans surveyed say stocks are not their preferred way to invest because the stock market is too scary, according to Bankrate questionnaire In January. This fear was found to be higher in young people, 29% of Generation Z members and 24% of Generation Y.
You may feel safe investing all your money in cash or bonds because there seems to be little room for financial loss; But according to financial advisors, this is misguided.
“When you’re young, worrying more about the downsides than the upsides is probably the biggest mistake,” said Josh Brown, CEO of Ritholtz Wealth Management. “You must be rich before you can focus on preserving your wealth.”
In fact, young people shouldn’t focus on cash positions or bonds in investment accounts, Brown said. Instead, he said, it should be fully invested in the stock market.
Young investors have time
It may seem counterintuitive that stocks are often a safer path for young investors when it comes to building long-term financial security.
Experts say that while stocks are generally more volatile than cash and bonds, they have also historically outperformed stocks over long periods; This is an important factor when it comes to growing wealth and beating inflation, which erodes the value of money over time.
The S&P 500, an index of the largest U.S. stocks, has averaged annual returns of 12 percent, including dividends, from 1928 to 2024. data Compiled by Aswath Damodaran, professor of finance at New York University.
By comparison, the data shows that 10-year U.S. Treasuries and corporate bonds had average annual returns of about 5 percent and 7 percent, respectively, over the same period.
Investors in their 20s and 30s have decades ahead in interest to recoup near-term financial losses from stocks.
“When you’re a young investor, you have something every professional investor dreams of, which is more time,” Brown said.
“When you appreciate how much time you have, you realize the benefit of long-term compounding,” he said. “Even if you think you’re taking more risk by buying and holding [stocks]You actually take less risk.”
How to buy and hold stocks
Fajrul Islam | An | Getty Images
Buying and holding stocks is only part of the equation; How investors hold them is also very important.
Beginning investors are best served by owning an index fund that tracks the stock market overall, rather than trying to pick individual company stocks that they or analysts think will perform well. The second strategy is risky because investors attribute their financial results to the success of a handful of stocks.
Index mutual funds and exchange-traded funds own a basket of hundreds of stocks that track the broad market. index funds It has historically outperformed most stock pickers over long periods of time and takes much of the complexity out of investing, experts said.
“If you’re going to self-manage and do it yourself, I would use the index [mutual] funds and index ETFs,” Brown said. “And until you have six-figure pure stock market exposure at a low cost, there’s really nothing else worth talking about.”
Young investors can start with a total market index fund, said Christine Benz, Morningstar’s director of personal finance and retirement planning.
Vanguard Total World Stock ETF (VT) is a good “one-time fund” for young investors, he said.
A balanced fund or target date fund can also work well, he said.
Balanced funds maintain a static asset allocation (i.e., the relative mix of assets such as stocks and bonds) over time. A target date fund is similar but gradually reduces stock exposure as investors age.
Advisors said investors should pay attention to the type of accounts in which they hold their assets. For example, to avoid an unexpected tax bill at the end of the year, it may make more sense to keep certain funds, such as a target date fund, in a tax-advantaged retirement account such as a 401(k) or IRA, rather than a taxable brokerage account, a type of non-retirement account.
This article is part of CNBC’s Let’s Get Personal (Finance) video series. Check out the entire video series to help you make smarter money decisions YouTube.
