When it comes to investing, millennials are falling behind. A new survey of 1,519 Americans aged 21 to 37 by TD Ameritrade finds that only 50 percent of millennials currently invest in the stock market, including employer-sponsored retirement accounts.
That jibes with other recent findings, too. Millennials are generally as conservative with their investments as retirees and that’s because so many of them feel intimidated by the market, Ally finds.
Getting started in the market doesn’t have to be daunting, though. There are ways to begin investing for the future without taking on too much risk: Both Warren Buffett and Tony Robbins recommend starting with index funds, especially for anyone young or new to the market.
“Consistently buy an S&P 500 low-cost index fund,” Buffett told CNBC’s On The Money. “I think it’s the thing that makes the most sense practically all of the time.”
You can think of an index fund as a basket of stocks with hundreds or thousands of different ones inside, explains Nick Holeman, a certified financial planner at Betterment. The S&P 500, for example, is a fund that holds stocks for the 500 largest companies in the U.S., which includes familiar names such as Apple, Google, Exxon and Johnson & Johnson.
“It’s the cheapest and easiest way to diversify your money that you’re investing,” Holeman says.
Because index funds ebb and flow with the market, they stay relatively consistent and avoid the risk associated with picking individual stocks.
“The trick is not to pick the right company; the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low cost way,” Buffett told On The Money.
He even says that investing in index funds would be the advice he’d leave for his wife if anything were to happen to him. And the Oracle of Omaha has put his money where his mouth is: In 2007, he made a $1 million bet against Protégé Partners that hedge funds wouldn’t outperform an S&P index fund, and he won.
Buffett’s choice fund, the Vanguard 500 Index Fund Admiral Shares, returned 7.1 percent compounded annually, while the basket of hedge funds his competitor chose returned an average of only 2.2 percent, the Wall Street Journal reports.
Robbins also stands by index funds. In an interview with Business Insider, he says that it’s crucial to diversify your investments and that index funds are a good place to start. “You can’t put all of [your money] in one place,” he says.
In his book “Unshakeable,” Robbins explains that funds dispense with the human error — and therefore most of the risk — inherent in picking stocks individually. “Index funds take a ‘passive’ approach that eliminates almost all trading activity,” he writes.
Because humans aren’t actively managing index funds, they also aren’t actively making mistakes. “When you own an index fund, you’re also protected against all the downright dumb, mildly misguided or merely unlucky decisions that active fund managers are liable to make,” Robbins writes.