How Millennials Should Choose Between Stocks, Bonds and Mutual Funds When Investing

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By most standards, millennials are between 28 and 43 years old as of 2024. This gives millennials roughly 24 to 39 years before they hit “full retirement age,” which is 67 for those born in 1960 or later. With multiple decades ahead of them before they retire, millennials can afford to be a bit more aggressive with their investments than, say, the boomer generation.

But, how should millennials approach the construction of their portfolios, and how should they choose between stocks, bonds and mutual funds when investing? Here are some tips — also, check out how Gen Z should invest.

Understand the Basics

You can’t invest successfully until you understand what your options are. While you don’t have to become a professional portfolio manager, you should take the time to learn at least the basics of how stocks, bonds and mutual funds perform — and which ones might be suitable investments for you.

With that in mind, here’s some information to get you started, although you should definitely take the time to dig deeper and get more complete answers.

Stocks

When you buy a stock, you own a portion of a company. You participate in the growth of that company through its appreciation in the marketplace and sometimes also through dividend payments.

Stocks can be volatile, as their prices are affected by multiple factors, ranging from earnings and revenue growth or decline, geopolitical turmoil, interest rates, inflation and even simple emotional market sentiment.

But the S&P 500 index, which contains the 500 largest companies in America, has a long-term average annual return of about 10%.

Bonds

If you’re a millennial looking for income more than growth, you might want to up your bond allocation. Bonds are issued by corporations or governments and make regular interest payments at a set interest rate until maturity, which can be anywhere from a few weeks to 30 years or more.

Although bonds are generally considered to be more conservative than stocks, since they have the issuer’s guarantee that they will return an investor’s principal, they can fluctuate — sometimes dramatically — in response to changes in market interest rates.

Mutual Funds

Mutual funds are diversified investments that collect money from numerous investors and invest them according to the fund’s stated objectives.

They can be less risky than owning individual securities, because you own tens or even hundreds of different securities in a single investment, instead of hanging your fortune on a single stock or bond.

Clearly Define Your Investment Objectives and Risk Tolerance

Your investment objectives define exactly what you want out of your portfolio. For example, is your goal to maximize capital growth? To generate income? Some combination of the two? Every investor is different, so it’s important that you take a close look at what you need out of your portfolio so that you can choose the right investments.

While everyone wants the highest investment return possible, the tradeoff for high potential gains is higher risk. If you can’t sleep at night if your portfolio regularly moves up and down 20% or more, you might have to trade off some potential returns for a less volatile portfolio.

What you want to end up with is the portfolio that meets your investment needs without taking on too much risk.

As a millennial, you have a fairly significant timeline before you retire, meaning you can better ride out the ups and downs of a stock-heavy portfolio.

What’s a Good Portfolio Allocation for a Millennial?

There is no single portfolio allocation that’s the right one for all millennials. But in a general sense, millennials have the advantage of time that allows them to endure various market cycles.

If the stock market falls 20% and you are about to retire, for example, that could be absolutely devastating to your portfolio. But if you are still 30 years away from retiring, you can take that short-term hit and ride it out until the market recovers, perhaps even adding money while the market is low to boost your long-term returns.

Deciding Percentages

One general rule for asset allocation is to subtract your age from 100 or 110 to determine how much of your portfolio should be in equities.

If you’re a 35-year-old millennial, for example, this would put your recommended equity allocation at 65% to 75%, with the remainder in income investments like bonds. However, you should tweak this very general suggestion based on your specific needs and risk tolerance.

What To Invest In

Whether your equity allocation should be in stocks or stock-oriented mutual funds is a personal decision.

Mutual funds are, by their nature, more diversified than individual stocks — and typically less volatile — but they may not offer the top return potential offered by direct ownership of stocks.

If you’re struggling to decide or feeling out of your depth, it’s a good idea to speak to a financial advisor for more personalized advice.

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