Andrew Simon wishes he had been one of those lucky investors who bought Google at $100 back when the company first offered shares to the public in August 2004. The 23-year-old teller at Chase Bank in San Francisco watched with envy as the search engine’s share price rose to a peak of $715 by December 2007. Now, Simon is getting his chance to buy one of his favorite stocks on sale. Last October, after the Dow Jones dipped and the S&P sagged, he purchased a small stake in Google (GOOG) at $356 per share–almost half of what it traded for a year earlier. At the same time, Simon loaded up on Intel (INTC), buying 30 shares at $14. When the price dropped to $13 in December, he bought 70 more shares. “It was like shopping on Black Friday, but the prices were even better,†he says.
Simon started investing in early 2008 after watching the share prices of many solid companies fall in lock step with the rest of the market. Believing that those companies and their prospects are destined to rebound, he decided to devote half of his biweekly paycheck to investing. Over the last year, Simon has scooped up stocks such as China Mobile Ltd. (CHL), a mobile telecommunications company, and Korean steelmaker POSCO (PKX). At Simon’s time of purchase, both companies’ shares and price-to-earnings ratios had fallen considerably from their 2007 heights.
Simon isn’t unique. Erika Smith, a 25-year-old technology consultant for IBM, is also taking advantage of low prices. Smith started investing after her parents opened a Roth IRA account for her as a graduation gift and provided seed money to get her started. Now she has expanded her stock portfolio. In December, Smith purchased shares of General Electric (GE), Duke Energy (DUK), and Honeywell (HON). Her logic: “I’ve been trying to identify cheap energy stocks since that has been a major focus of the Obama administration,†explains Smith. “When his plan is kicked out, I’m sure I’ll see an increase in their value.â€
Even as older generations continue to grumble about how 2008 depleted their nest eggs, twenty-somethings–many starting to invest for the first time–are aggressively plunging into the market. What they’re finding are attractive valuations. For Simon and his peers, investing requires a sense of youthful optimism, a belief that the market and the U.S. economy will rise again. A new study commissioned by Scottrade showed that 54% of Gen Y investors have confidence in the market recovering and expect to see improvement by the end of 2009. Of course, it’s easy to have that kind of bright-eyed attitude if you won’t need retirement money for another 40 years or so.
Broadly, the trend is hard to quantify, but during 2008, nearly 200,000 investors age 30 and under opened new accounts with ShareBuilder, the investment arm of ING Direct. That represented an 81% increase over the number of new accounts opened by the group in 2007. TradeKing, an online stock trading and options trading broker, saw a 28% year-over-year increase in accounts opened by people under 30.
By no means do Smith and Simon represent the norm. There are still large numbers of young adults, particularly African Americans, who fail to invest early. According to the advocacy group United Fair Economy’s most recent report on U.S. saving and investing, only 18% of blacks have retirement accounts, compared to 43.4% of their white counterparts. Furthermore, younger workers are less likely to participate in a retirement plan than older workers with the same earnings, according to the Employee Benefit Research Institute. “In their minds retirement is a really long time away and they don’t realize that the 30 or 40 years that a person can invest are valuable years,†says Ed Fullbright of Fullbright Financial Consulting in Durham, North Carolina.
Here’s an example to bolster Fullbright’s point: If a 20-year-old deposits $50 in the bank each month for 45 years with an interest rate of 3% compounded monthly with an initial starting balance of $500, the final savings balance, assuming retirement at 65, will be $58,944.11. By contrast, if the same person waits until 30 to start investing that same $50 per month, the total at retirement would equal $38,505.14.
That’s a message young investors have a hard time communicating to their friends. Charles Weems III, a 27-year-old software engineer, says many of his peers think investing will take away from having fun. “Most young people are more concerned with driving a nice car and going on trips; they want this lavish lifestyle,†he says. Weems is speaking from experience. When he started working he spent most of his money eating out, taking road trips, and picking up the tab during nights out with friends. Now he realizes he can put money away and still live life. A few years ago, he started contributing 10% of his income to his 401(k). He also puts $400 each month in
to a Roth IRA. Since last September, he has devoted between $400 and $700 a month to investing. Weems recently purchased more than 250 shares of Fannie Mae (FNM) while it was trading at $2.38. He believes that the government bailout will help the company regain its footing.Young investors find that they often have to dispel myths when talking to their friends about delving into the markets. One of those myths: Investing is too complicated. Kevin Njeru, an 18-year-old junior at the University of Florida, decided to jump into the market during the fall of 2008 after joining the campus investment club. “When I first started I thought [investing] was going to be difficult, but it’s not difficult at all if you’re willing to put in the time,†he says.
Njeru bought $400 worth of shares in the exchange-traded fund Vanguard Information Technology (VGT), which tracks the performance of several large, medium, and small U.S. companies. Exchange-traded funds (ETFs), allow him to hold dozens, hundreds, or even thousands of companies under one umbrella. Njeru’s excitement about the fund stems from his belief that the economy will recover, and that companies such as Apple and Intel will continue to be innovative and power future U.S. growth. “Young people spend so much time on Facebook and MySpace, but they can just as easily have another tab open researching stocks,†he says.
The second big myth about investing: You need a lot of money to start. So not true. It doesn’t matter how little you start with, the key, say many Generation Y investors, is that you begin while you’re still young. “You don’t need hundreds of thousands of dollars to invest. Warren Buffet and Bill Gates started out small, they started out with what they had,†says Simon.
“There’s definitely a reward at the end of this.â€
— Additional reporting by Renita Burns.