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This is the ‘biggest mistake’ young investors make, Josh Brown says
Josh Brown.
Danielle DeVries | CNBC
Investing can feel daunting for newbies.
About 21% of surveyed Americans say stocks aren’t their preferred way to invest because the stock market is too intimidating, according to a Bankrate poll in January. That fear skewed higher for younger people, to 29% of Gen Z members and 24% of millennials, it found.
Putting all your money in cash or bonds may feel safe, because it seems like there’s little scope for financial loss — but this is misguided, according to financial advisors.
“When you’re young, worrying more about downside than upside is probably the biggest mistake,” said Josh Brown, CEO of Ritholtz Wealth Management. “You have to get rich before you focus on preserving your wealth.”
In fact, young people shouldn’t be focused at all on cash positions or bonds in their investment accounts, Brown said. Instead, they should be fully invested in the stock market, he said.
Young investors have time on their side
It may seem counterintuitive that stocks are generally the safer route for young investors when it comes to building long-term financial security.
While stocks are generally more volatile than cash and bonds, stocks have also historically outperformed them over long periods — an important factor when it comes to growing wealth and beating inflation, which erodes the value of money over time, experts said.
The S&P 500, an index of the largest U.S. stocks, had an average annual return of almost 12%, including dividends, from 1928 through 2024, according to data compiled by Aswath Damodaran, a finance professor at New York University.
By comparison, 10-year U.S. Treasury bonds and corporate bonds had an average annual return of about 5% and 7% over the same period, respectively, the data shows.
Investors in their 20s and 30s have decades ahead of them for interest to compound and recoup any near-term financial losses from stocks.
“When you’re a young investor, you have something at your disposal that every professional investor dreams that they can have, which is more time,” Brown said.
“When you appreciate how much time you have, you recognize the benefit of long-term compounding,” he said. “Even though you think you’re taking more risk by buying and holding [stocks], you’re actually taking less risk.”
How to buy and hold stocks
Fajrul Islam | Moment | Getty Images
Buying and holding stocks is just one part of the equation — how investors hold them matters a lot, too.
Investors who are just starting out are generally best served by owning an index fund that tracks the broad stock market, instead of trying to pick individual company stocks that they or analysts think will perform well. The latter strategy is risky, since investors peg their financial outcomes to the success of a handful of stocks.
Index mutual funds and exchange-traded funds hold a basket of hundreds of stocks that track the broad market. Index funds have historically outperformed most stock pickers over long stretches of time and take a lot of the complexity out of investing, experts said.
“If you’re going to be self-directed and you’re going to do it yourself, I would utilize index [mutual] funds and index ETFs,” Brown said. “And until you’ve got six figures of pure stock market exposure at a low cost, there’s really nothing else worth talking about.”
Young investors can start out with a total market index fund, said Christine Benz, director of personal finance and retirement planning for Morningstar.
An all-stock index fund that provides U.S. and non-U.S. stock exposure, such as the Vanguard Total World Stock ETF (VT), is a good “one-and-done fund” for young investors, she said.
A balanced fund or target-date fund may also work well, she said.
Balanced funds maintain a static asset allocation — that is, the relative mix of assets such as stocks and bonds — over time. A target-date fund is similar, but gradually winds down its stock exposure as investors age.
Investors should be mindful of the type of account in which they hold their assets, advisors said. For example, it may make more sense to hold certain funds such as a target-date fund in a tax-advantaged retirement account such as a 401(k) or IRA instead of a taxable brokerage account, a type of non-retirement account, to prevent an unexpected tax bill at year-end.
This article is part of CNBC’s Let’s Get Personal (Finance) video series. Check out the full lineup of videos to help you make smarter money decisions on YouTube.
