Investing & Financial Advice for Millennials – 6 Principles to Build Wealth

Atlantic Magazine asserts that Millennials are the “best-educated generation in American history,” with more than a third holding a bachelor’s degree or higher. Nevertheless, they may become the first generation of Americans to be worse off than their parents, with lower incomes, more debt, and higher poverty rates.

To succeed, Millennials will need some major preparation, especially considering the world around them is changing constantly. This article will answer three questions that are critical to the success of every Millennial:

  1. Which obstacles will this generation face during their careers?
  2. Who can Millennials trust for financial advice?
  3. What are the most important, time-tested strategies for building wealth?

Millennials Face Mounting Challenges

The challenges facing young people born between 1976-1996 are unlike those faced by any previous generation. The workplace of this generation has drastically changed from the one encountered by their grandparents and parents:

Slower Economic Growth

For the working careers of most Millennials (2010-2060), economic growth measured by gross domestic product (GDP) will average 2.08% annually, according to projections by the Organization for Economic Co-operation and Development (OECD). This rate is less than half the rate of GDP growth of 6.86% experienced in the previous half-century (1960-2010) calculated from figures supplied by the Federal Reserve Bank of St. Louis.

Increased Skill Requirements

Physical work requiring little to no formal training is quickly disappearing as intelligent machines assume more of the tasks formerly done by humans. According to figures compiled by the Brookings Institute, the manufacturing sector’s share of GDP accounted for 12.1% of annual real GDP during the period 1960-2010, while its proportion of the workforce fell from approximately 25% to 8.8%.

Expanded Workplace Automation

Routine tasks are increasingly becoming mechanized. Some experts found that 47% of workers in America had jobs at high risk of automation. The jobs at risk include taxi and delivery drivers, receptionists, programmers, telemarketers, and accountants.

Reduced Employee Benefits

Defined contribution retirement plans have replaced defined benefit plans (pensions), while more employers are transferring health care costs to employees in the form of higher insurance premiums, co-pays, and limited coverages.

Extended Nontraditional Employment

Contract labor is replacing employees as companies seek to lower fixed costs and increase flexibility. One report estimates that more than 40% of the American workforce – 60 million workers – will be self-employed as freelancers, contractors, or temporary employees by 2020.

Escalated Income Inequality

The historical link between productivity and pay is disappearing, exacerbating the disparity between the “haves” and “have-nots.” In 1970, almost two-thirds of Americans were considered middle class, reflecting the link between productivity and pay between 1948 and 1973. Although productivity has continued to increase, about half of American families were considered “middle class” in 2014, according to the Pew Research Center. Rising income inequality is likely here to stay.

Fragile Social Programs

The survival of social safety nets, such as Social Security and Medicare is uncertain as Federal and local governments wrestle with unprecedented national debt levels. Simply put, neither Social Security nor Medicare is guaranteed for future beneficiaries without significant changes in the programs.
 
Eugene Steeple of the Urban Institute predicts that Millennials are likely to experience cuts in benefits for themselves and their children, higher taxes, and reduced government services. This is partially a consequence of financing much of America’s growth and increased standard of living during the last 50 years with borrowed funds. According to Pew Research, most American households are vulnerable to financial disaster:
 
1. Family Income Is Increasingly Volatile. More than 40% of families experience an income gain or drop of more than 25% every two years. While drops and gains have balanced out in recent years (about the same number increasing income as those losing income), only two-thirds of those families suffering a drop recover their previous income level within the next decade.
 
2. Emergency Savings Are Virtually Nonexistent. Most households (75%) lack sufficient emergency funds to replace their income for a 30-day period. The top quarter of households have savings to cover just 52 days of income. Liquidating their investments and retirement funds would increase this to an estimated 98 days of protection. In other words, three-quarters of American families could cover only four months of their income (without selling their homes) if a major economic shock occurred.
 
3. Almost Half of Families Spend More Than They Earn. As a consequence, they are unable to save and rely on borrowing to make ends meet. One in 11 Americans now pays more than 40% of their income on interest and debt repayment.
 
In addition to an uncertain economic future, Millennials begin their working careers with greater student debt than any previous generation: $16,500 for a 1999 graduate, rising to $37,172 for a 2016 graduate. In other words, the average Millennial graduate is shackled to a $23,000 ball and chain (the average debt for graduates during the period) that will impact retirement savings, homeownership, and the age of marriage and parenthood.
 
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Dealing with Life’s Risks


 
BASE jumping is one of the most dangerous sports a human can undertake, with one fatality per 60 participants. The desire to jump from great heights is practiced by a small percentage of extreme sports enthusiasts. BASE jumping, like sky-diving, skiing potentially fatal slopes, or rock climbing without a rope, is a high-risk activity.
 
According to The New Zealand Medical Journal, the likelihood of injury or death from BASE jumping is 5 to 8 times greater than skydiving. Why would any sane person take such risks? Dr. Erik Monastery, one of the authors of the study, noted that BASE jumpers score high on a measure called novelty seeking: the person’s propensity to become easily bored and look for exciting activities. They also have a low sense of harm avoidance, so they have the advantage of “confidence in the face of danger and uncertainty, leading to optimistic and energetic efforts with little or no distress.”
 
Some have characterized those who regularly take such risk as adrenaline junkies or daredevils. They actively seek sensation in activities like skydiving. Dr. Cynthia Thomson of the University of British Columbia suggests that risk-taking behavior may be genetically based. Her research found that people attracted to dangerous sports shared a common genotype, a variant of the DRD4 receptor commonly called the “adventure gene.”
 
So, is risk-seeking behavior genetic or a matter of choice? How can we use these answers to make better decisions and lead happier lives?

What Is Risk?

Uncertainty pervades every aspect of life; the future is unknown. The term “risk” refers the negative aspect of that uncertainty – the possibility that something harmful may or may not occur. Risk differs from loss just as uncertainty differs from certainty. Running across a busy street blindfolded is a risk; getting hit by a car while doing so is a loss.
 
Risk is present in everything we do. For example, a person could be injured by a herd of stampeding zebras while walking the streets of Manhattan, although there are no recorded instances of such occurring.

Probability

For that reason, the Stanford Encyclopedia of Philosophy refined the definition by replacing the word “possibility” with “probability.” In common terms, risk is referred to as “odds.” For example, the probability of your home being damaged by a fire in the coming year is about one-quarter of 1% (0.0028%) while the probability that you will die in the future (based on current science) is 100%. The risk of death is not an if, but when. However, probability alone is not enough to understand risk and effectively manage it.

Impact

A second dimension of risk is consequence. In other words, what is the impact upon those experiencing the event? The impact may be slight or catastrophic. For example, the probability of the paperboy tossing your morning edition into the shrubs sometime during the year is high, but the consequences are slight (inconvenience and possibly scratched retrieving the paper). On the other hand, the likelihood of a tornado destroying your home in Elmhurst, New York is low, but the financial costs of such an event would be significant.
 
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Can Social Security Be Saved?

More than one-half of Millennials believe there will be no money in the Social Security system by the time they are ready to retire, according to a 2014 Pew Research report. “I don’t think anyone honestly expects to Collect a single penny they pay into social security. I think everyone acknowledges that it’s going to go bankrupt or kaput,” says Doug Coupland, author of “Generation X.”
 
What went wrong? Will Social Security go bankrupt?

A Brief History of Social Security

In 1935, few of the program’s creators could have anticipated the condition of the Social Security program today. The country was in the midst of the Great Depression with a quarter of its labor force – 15 million workers – idle, and those with jobs struggled to make ends meet as their hourly wages dropped more than 50% from 1929 to 1935. Families lost their homes, unable to pay the mortgage or rent. Older workers bore the brunt of the job losses, and few had the means to be self-supporting. One despairing Chicago resident in 1934 claimed, “A man over 40 might as well go out and shoot himself.”
 
Hundreds of banks failed, erasing years of savings of many Americans in a half-decade. People lived in shanty towns (“Hoovervilles”) or slept outside under “Hoover blankets” (discarded newspapers). Breadlines emerged in cities and towns to feed the hungry. Thousands of young American men hopped passing trains, sneaking into open boxcars in a desperate attempt to find work.
 
Democrat Franklin D. Roosevelt (FDR), promising a New Deal, defeated former President Herbert Hoover in 1932 with more than 57% of the popular vote and 472 of 531 Electoral College votes. Three years later, FDR signed a bill that would “give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
 
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Country Wisdom & Investing

country barnCountry wisdom is the collection of practical experiences gained by generations of pioneers, farmers, and ranchers as America transformed from a vast frontier to the world’s greatest economy. That experience – the result of constant trial and error – was passed from parent to child in plain language that left no room for misinterpretation. Living on a farm or ranch miles from the nearest neighbor meant solving problems on your own, making do with the materials around you, and accepting whatever happened and moving on.
 
Country people know that worry is like riding a rocking horse – it’s something to do, but gets you nowhere. Excuses and explanations count for little if the seed is not in the ground by the spring rains to make a crop. You don’t blame the cow when the milk gets sour, but change the pasture where she eats.
Country Sayings to Invest By
 
The wisdom gained over years of self-reliance in a lonely, often hostile environment remains just as applicable today in our modern, urban setting as at the turn of the century. The lessons of a country life – expressed in simple, understandable language – are especially pertinent for a beginning or inexperienced investor seeking to negotiate a confusing, constantly changing terrain of potential investments and prices. The following country proverbs are tested and true bits of wisdom you can apply equally to your investments and your life.

1. “The Quickest Way to Double Your Money Is to Fold It Over and Put It In Your Pocket”

Everyone expects to make money in the stock market, but few have realistic expectations of probable returns. Inexperienced investors frequently buy stocks on the advice of acquaintances or friends who brag about their experiences, implying that investment success is easy.
 
Everyone expects to buy the next Apple or Microsoft, allowing them to retire at age 30 or 35. However, doubling your money in a single year is highly unlikely, and becoming wealthy overnight a pipe dream for most people.
 
Here are two keys to stock market success and long-term financial independence:

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