4 International Investing Tips for Millennials
How International Investing Can Help Millennials
Millennials have lived through the Great Recession and tend to be more risk-averse than past generations. However, their reluctance to invest in stocks and take on risk at a young age could result in significant long-term opportunity costs. The good news is that international investing could be helpful in reducing risk through diversification while sidestepping potential concerns of trouble brewing in the U.S. economy.
Here are four tips to help Millennials diversify risk and increase their returns over the long run.
1. Diversify Outside of the U.S.
Goldman Sachs surveyed Millennials and found that only 18 percent of them trusted the stock market as ‘the best way to save for the future’, while a separate CNNMoney survey found that 93 percent of Millennials distrusted the markets and lacked investing knowledge. Many Millennials have responded by focusing on repaying debt or keeping much of their wealth in cash, but that could prove costly over the long-term as opportunity costs mount.
Millennials may want to consider investing outside of the United States as a means to sidestep concerns about the U.S. economy, diversify risk in their portfolios, and potentially increase their returns over the long-run. After all, the U.S. accounts for just 20 percent of global gross domestic product (“GDP”) as high-growth emerging markets have outpaced developed countries. A U.S.-only portfolio doesn’t have exposure to these fast-growing global markets.
2. Consider Riskier Markets
A 2016 UBS study found that Millennials between the ages of 21 and 36 are the most fiscally conservative generation since the Great Depression. This risk aversion shouldn’t be surprising given that many of them grew up through the Great Recession—the worst economic downturn since the Great Depression. But unfortunately, not taking on enough risk in younger years can lead to significant opportunity costs later on due to the effects of compounding.
Millennials may want to consider diversifying into riskier international markets while they’re young, including both emerging and frontier markets. While these markets have greater volatility in the short-term, they tend to offer better return potential over the long run. Younger investors that don’t need to withdraw funds for a long period of time can benefit from these higher returns since they aren’t risking the need to withdraw funds at a bad time.
3. Don’t Forget to Rebalance
It’s easy to build a portfolio and contribute a set amount each month or quarter into different investments. Unfortunately, the performance of those investments can influence the make-up of the portfolio over long periods of time. For example, an investor contributing 25 percent of their monthly capital to international stocks might check their portfolio in a decade to find that these stocks account for half of their portfolio if international stocks outperform U.S. stocks.
Millennials should periodically check their portfolio and adjust their positions or asset allocations to ensure the right level of risk. If that’s too difficult, they may want to consider working with a financial advisor or automated investment platform to ensure these mundane tasks get accomplished on a regular basis. These efforts can help improve returns over the long-run, and more importantly, ensure that investors aren’t taking on more risk than they’d like.
4. Be Consistent Over Time
Millennials that lived through the Great Recession may be keen on avoiding these kinds of declines in the future. But, trying to sell stocks just before a decline and buy them just as the market bottoms out is often a fool’s errand. According to a Fidelity study, investing capital immediately in the market tends to produce the highest returns over a plethora of time periods, while bad timing only outperformed ‘staying in cash’.
Millennials may find themselves especially exposed to these pressures to time the market when buying and selling international stocks. It’s easy to see headlines about Greece’s defaults or the ‘Brexit’ and feel compelled to sell the stocks. At the same time, it’s easy to hear about the next hot emerging market and feel compelled to buy. But, the best performers tend to be those that contribute evenly over time rather than trying to time the market.
The Bottom Line
Millennials may be a risk-averse generation, but that doesn’t have to translate into poor investment decisions. Investing in international markets can help reduce risks through diversification and potentially generate greater returns over the long run, but it’s important to ensure that a portfolio is properly balanced on a regular basis. By keeping these tips in mind, Millennials can help ensure they’re maximizing their returns over time.