Written by Katie Gomez

Participating in the stock market is not for the faint of heart, but it is also not contingent on how long that heart has been beating. Just because older generations like GenX have had some success does not mean that millennials just be dismissed. On the contrary, millennials (and GenZ) are slowly becoming a force to be reckoned with when it comes to investing; they just need to see that for themselves. Millennials and GenZ are the future of investing, but they are far from acting like it. In this article, I will review what most millennials need to do better regarding investing and portfolio management and present solutions. 

Are Millennials Managing Volatility or Avoiding It?

One of the most crucial aspects of investing is risk management. However, millennials tend to sidestep that risk and avoid the anxiety of short-term market fluctuations altogether. That said, it is no surprise that over 50% of millennials say they avoid dealing with the stock market due to its higher levels of risk and unpredictability. Instead, they take the more conservative route with investments such as bonds automatically input to their 401k, doing the lowest-risk bare minimum version of investing. 

This over-conservative approach to investing is one of the biggest reasons millennials are not succeeding in their investments. Ironically, concentrating one’s savings in a relatively narrow mix of conservative investments (i.e., bonds) is not as conservative an approach as one would think. For example, according to Wells Fargo Asset Management (2023), a portfolio comprising 70% stocks and 30% bonds had returns that monumentally outperformed a portfolio of 100% bonds in the last 30 years. 

Although equities like stocks and cryptocurrency are the riskier choice, the risk of generating more wealth is much greater than the short-term losses you’ll suffer. The fear of losing money causes us to avoid the risk of that happening, resulting in the loss of potential profit in its place. Our returns (output) directly correlate with our risk (input) in the investment; if we always play it safe and invest conservatively, it shows. 

Therefore, millennials must learn risk management to find a ratio of risk to reward that is sustainable yet lucrative in the long run. Unfortunately, the over-conservative approach to investing is one of the biggest reasons our mistakes may stem from inexperience, lack of confidence in decision-making, and avoiding risks.

So what should millennials do?

1.) Broaden their view of volatility to their portfolios, not just specific investments:

Young investors must begin changing their mindset to view things in the long term by prioritizing delayed gratification and trust in their investment plans. 

A highly correlated portfolio offers more volatility (what millennials tend to ignore due to fear of loss). On the other hand, an overly conservative portfolio could result in weak to modest returns that cannot offset losses over time. Therefore, it is crucial to start thinking of investing as a whole portfolio, not just individual investments, because the collective builds profit. If your entire portfolio remains made up of various bonds, lacking diversity, you are closing yourself off from maximizing your returns in the long run.

2. Millennials must expand their focus on volatility from risk to expected returns.

When it becomes impossible to eliminate the fear surrounding the loss of money, we must outshine that fear with a greater one: the fear of losing more money potential by playing it safe. Stocks and bonds vary in frequency and severity when it comes to providing expected/unexpected results for investors. These varying degrees can lead to a stock being highly volatile with frequent downswings. 

Instead of constantly thinking glass half empty, focusing on the low volatility and risking their investments, millennials must remember that volatility also swings high, resulting in gains that have the potential to grow the value of a portfolio exponentially. Again, thinking long term and shifting perspective to the good that can happen over the bad that might. You can either overlook short-term losses as a stepping stone to success or continue to view them as a detrimental failure to avoid at all costs; if Millennials want their investments to succeed, they must start embodying the mindset that the former offers. They can practice this long-view evaluation by calculating an investment variation (the differences between its returns on a year vs. year based). Additionally, investors can gauge volatility by calculating an investment’s standard deviation from its annual average return value. 

3.) Rather than avoid volatility altogether, millennials should manage volatility through portfolio diversification.

Most inexperienced traders tend to have a portfolio that consists of mainly one thing: stocks or bonds. However, diversification is what allows portfolios to see the most success. Although avoiding the stock market’s volatility leads to loss of potential income, it doesn’t mean millennials should transfer all their bond equities into stocks, as stocks can also have a high correlation. For instance, if you comprise your portfolio of only energy stocks, the plummeting of oil prices could destroy the entirety of your investments. 

Instead, buying a smaller amount of energy stock would be wiser and using the leftover money to diversify and invest in other equities/securities. That way, if oil prices went down, it would only hurt a fraction of their investment portfolio. Additionally, millennials can avoid losing their portfolio by diversifying across various investments, such as stocks, precious metals, crypto, and bonds—the more diverse, the better. In other words, do not put all your eggs (assets) in one basket (portfolio).

So how should Millennials construct their portfolios? 

The construction of portfolios is where the investor should start focusing on asset allocation—the concept of structuring and continuous rebalancing of investment portfolios. Although there is no one-size-fits-all asset allocation strategy that millennials should follow, composing their portfolios based on their unique financial situations, risk tolerances, and goals for life during work and retirement.

In conclusion, their inexperience and lack of commitment to the uncomfortable lead millennials to go down a path of mediocre investing rather than experience the potential success on the other side of risk and responsibility. If you are a millennial struggling with finding a rhythm or maximizing returns, start thinking long-term, and trust in your risks to yield better rewards. Beginning your investing journey may seem challenging, but managing your investments takes real work. 

Anyone can invest, but when you venture into the unknown, take more risks, and commit to building the most substantial portfolio, you transcend into a great investor. Your investments are a direct investment in your belief in yourself. If you stay in that mindset of the scared, inexperienced millennial trader that lacks the confidence to make big moves, your returns will continue to be a direct reflection of that. Nevertheless, the moment you decide to envision real success (not just the bare minimum for your retirement accounts), you begin to change your mindset, attitude, and belief in your investments. That is the key to the lucrative returns you desire. 

References 

https://www.investopedia.com/articles/02/051502.asp#:~:text=One%20way%20to%20deal%20with,attention%20to%20short%2Dterm%20fluctuations.

https://www.mlive.com/sponsor-content-n/?prx_t=zpQCAr50MAnM0LA