When it comes to investing, Gen Z has the advantage of time on their side. Born between 1997 and 2012, those in this generation are roughly 12 to 27 years old, meaning the young adults of the group have decades ahead of them to put their money toward that which will build them long-term, sustainable wealth.
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But with so many investment options out there — like stocks, bonds and mutual funds — it can be hard to choose the “right” one. Considering everyone’s goals, risk tolerance levels and income situation is different, there’s no one-size-fits-all approach to investing.
That said, experts do have some advice on what Gen Z can do to figure out where to invest their money.
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Go With the KISS Strategy
If you’re not familiar with the KISS strategy, it stands for “keep it simple, stupid.” A little harsh, but there’s a reason it works.
Mutual funds can be a good option for those just starting out since they generally have low fees. But some experts believe that index funds are the better option. They also have low fees but may have a lower overall expense ratio.
“For the vast majority of investors, the best investment strategy is a KISS strategy — people should invest in a low-fee, diversified equity index fund and continue to invest consistently whether the market is up, down, or sideways,” said Robert R. Johnson, PhD, CFA, CAIA, professor at Heider College of Business, Creighton University.
Taking it one step further, Johnson suggested the idea of dollar-cost averaging.
“Dollar-cost averaging into an index mutual fund or ETF is a terrific lifelong strategy,” he said. “Dollar-cost averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time. For the vast majority of investors, the KISS mantra — keep it simple, stupid — should guide their investment philosophy.”
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Educate Yourself Before Investing in Anything
It never hurts to educate yourself before investing — whether it’s in stocks, bonds, mutual funds or something else.
“It’s crucial to take time to educate yourself on investment options, market trends, and financial planning strategies,” said fintech product manager at Plynk, Jared Hubbard. “Empowering your own financial literacy could enable better-informed decisions! An effective investing strategy takes into account your risk tolerance, time horizon, and the amount of time and energy you want to spend managing your investments.”
Stocks Can Be Used in a Long-Term Investment Strategy
Since Gen Z has so much time on their side, long-term investments like stocks could be a good option — depending on one’s risk tolerance. The stock market can be volatile, though it tends to right itself over time.
“The surest way to build true long-term wealth for retirement is to invest in the stock market,” said Johnson.
Citing Duff & Phelps data, he added that the average annual return on large cap stocks since 1926 is 10.1%. “If these historical average returns hold in the future, an investor would double their money in slightly over 7 years, and have 10 times their original investment in 23 years.”
He gave an old Wall Street adage: “You can sleep well or eat well.”
“You will sleep well if you commit funds to low-risk investments like money market funds or Treasury Bills, but your investments will not grow substantially and may even have trouble keeping pace with inflation,” he said. “You will eat well by consistently investing in stocks.”
If you can’t tolerate the risk, however, you can always diversify your portfolio with lower-risk investments — like bonds. These might not produce the same returns, but it might be easier to sleep at night knowing there’s less risk involved (generally speaking).
All 3 Have Their Benefits and Drawbacks
Stocks, bonds and mutual funds can all be solid investments. Since choosing between them can be tricky, Hubbard suggested consulting a financial advisor to iron out an investment strategy that works for you.
While you’re at it, you can also diversify your portfolio and potentially invest in two or more of these options.
“Diversification means that you spread your money across a variety of different investments,” said Hubbard. “For example, rather than putting all your savings into a single stock, mutual fund, or exchange-traded fund (ETF), or keeping it in cash, you invest in a mix of some or all of these. Creating a well-balanced, diversified portfolio may mitigate unnecessary risk.”
Hubbard did add that diversification doesn’t guarantee profit or automatically protect you against loss.
Choose Based on What Matters To You
Investing isn’t only about gains, though that’s a definite plus. It’s also about choosing investments that suit your interests and values.
“Investing is a more enjoyable and fulfilling experience when you can follow what you believe in,” said Hubbard. “Maybe it’s a technology that excites you, a company you’re inspired by, or a desire to invest in diversely led companies. Either way, you want to invest in what matters to you.”
Decide Whether You Want To Invest in Individual Stocks or Not
Investing in individual stocks is an option, but it might not be the best strategy for individual investors. Since Gen Z is so young, mutual funds might be the better choice.
“I believe Gen Z should be considering the large cap growth of ETF’s or mutual funds specifically when deciding where to invest money and what exactly to buy,” said Ron Tallou, founder and owner of Tallou Financial Services.
“Rather than guessing which individual stocks to purchase and hope they make you a lot of money, the large cap growth funds will do it on your behalf because the portfolio managers at the investment institutions make those calls,” Tallou continued. “Large caps growth funds typically give the best long term returns, especially if you are saving for long-term like retirement and given the age bracket of Gen Z it’s the best starting point for them.”
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This article originally appeared on GOBankingRates.com: Gen Z Investing: How To Choose Between Stocks, Bonds and Mutual Funds