The Best Investment Strategy for Millennial Investors

1. The Best Investment Strategy for Millennial Investors Introduction to Millennial Investing Millennials are a generation which have endured many financial hardships, having  entered the workforce in the fire and embers of the great recession, they are struggling  to build the same nest-egg that older generations might have had due to lower wages,  mixed with sky-high debt and rent. It seems that millennial investing has never been  tougher.    And yet, due to their age, millennials can invest more aggressively and are in a               unique position to profit from the bull market that has taken hold. The US stock               market is up nearly 100% over the past 5 years. Millennial investing has never been                   so exciting.                                                If a 26 year old invested $5 a day, the price of a cup of coffee, on retirement at age 65,  they would be sitting on $3.2M! This assumes a 15% growth rate; an interest rate which  can be achieved by following structured investing processes such as those outlined in  this article.    Let’s cut straight to the chase. Millennials are in a position to achieve extraordinary  returns by investing quantitatively. By using computers to aid in stock selection, returns  upwards of 15% can be achieved by the everyday investor. This does not mean  high-frequency day-trading, in fact sometimes the simplest trading strategies can be the  most performant. Quantitative investing is beginning to seriously alter millennial  investing for good.    Aikido Finance is the leading resource for quantitative investment strategies. Aikido  supplies a catalog of evidence-based investing strategies which have outperformed the  market over the past 20+ years. These simple strategies help you build a portfolio in  minutes and are tailored for millennial investing.    Let’s explore some of the best investment strategies for the millennial investor. 

2.     The Mindset There are three pillars to being a successful investor.    1. Invest consistently  2. Invest for the long term.  3. Invest systematically 

3. 1. Invest Consistently The best way to invest consistently is to put away x% of your pay cheque each month.  The more you put away, the faster you will reach your financial goals.    Millennials are increasingly becoming interested in the FIRE (Financial Independence  Retire Early) movement. These investors are interested in fast-tracking their financial  freedom through a consistent investing methodology. Assuming a 15% growth rate and  a fixed income, here are some crazy stats for the aspiring early retiree! You can check  out our blog post here on the FIRE movement.    ● If you save and invest 25% of your income, you will be able to retire in  17 years.  ● If you save and invest 50% of your income, you will be able to retire in  11 years.  ● If you save and invest 75% of your income, you will be able to retire in 5 and  a half years.      Only by investing consistently can the investor confidently hope for these results.    For example, per the graphic to the right, if your after tax income is 50k, you spend only                   10k a year, and invest the rest, you can expect to retire in 5.8 years. This assumes a                   4% rate of withdrawal per year. The graphic is kindly supplied by fourpillarfreedom.                                        Quick tip #1: ​Automate your finances. Set Up a standing order to automatically             transfer funds from your bank to your broker each month.               

4.     2. Invest for the Long Term “Most people overestimate what they can do in one year and underestimate what  they can do in ten years.” ​– Bill Gates    By giving ourselves a long time horizon, we increase the amount of time we have for our                 investments (or good habits) to compound and grow. Albert Einstein once declared that             compound interest was the 8th wonder of the world. Millennial investing requires time.                                    By​ ​long term investment strategies​ ​mindset, we avoid the nerves that come with market  dips. Don’t mind the ups and downs, let compound interest do its job and leave your  investments alone! Give your investments time to grow. It takes years, not days. You  can check out our blog post here on compound interest investing. 

5. Quick tip #2: ​Don’t look at your portfolio! I rebalance my portfolio once per month, but  never once do I peek in the interim. The performance of my investments is outside my  circle of control, so I don’t think about it. Focus on process, not on immediate result.  Don’t be a ticker watcher, there’s no need to check every minute. Think long term.    3. Invest Systematically Why use a model? In their macro trends study, Dresdner Kleinwort looked at the success rate of the  diagnosis of psychosis by two cohorts: inexperienced medical students, and  experienced doctors. They found that the doctors were marginally more successful in  their diagnoses than the medical students (64% to 59%). A simple model was then  introduced to aid the cohorts in their diagnoses. Both the students and doctors  performed much better this time (67% and 75% respectively). However, when the model  was used on its own, with no qualitative judgement taken into account whatsoever, it  outperformed all other scenarios with an 83% success rate.    So, what can we take from this study? A model is a ceiling which we try to reach, but not  a floor on which we build on. We tend to detract from the results of a model rather than 

6. build upon them. If a model can help in something as qualitative as diagnostic medicine,  imagine how powerful it is when used with something as quantifiable as cash.    “If you can’t describe what you are doing as a process, you don’t know what you are  doing” ​– W. Edwards Deming    Most people don’t beat the market: Most investors fail to beat the market, ​this is largely due to their qualitative methods of  investing and by failing to use a rules-based approach. Millennial investing is best  served by using systems, not stories, and trusting evidence, not opinion. The reason  that the number of passive index funds (ETFs) is up 350% from a decade ago is  because they are performant. They are performant because they follow a rigid strategy  and  inherently do not time the market. Investing in the S&P 500 index is ultimately a  quantitative method of investing.    Eligibility for S&P 500 inclusion: To be eligible for S&P 500 inclusion, a company should be a U.S. company, have a  market capitalization of at least USD 8.2 billion, be highly liquid, have a public float of               at least 10% of its shares outstanding, and its most recent quarter’s earnings and the               sum of its trailing four consecutive quarters’.                                      An ETF (Exchange Traded Fund) is a security which holds a collection of stocks. It  removes the necessity for the investor to pick individual stocks by providing a basket               of pre-selected stocks.                  Even Warren Buffett is fundamentally a quantitative investor. He utilizes the value and  quality factors to select only undervalued, high-quality companies. Joel Greenblatt  quantified Warren Buffett’s methodology in ​The little book that beats the market,  creating what he called ‘the magic formula’. ​B​y selecting only companies with a low  EV/EBIT (good value) and a high ROIC (high quality), one could have achieved a 30%  annual return between 1988 and 2004.    So, clearly using a rules-based approach works.    Use an investing thesis:

7. Returns go up and returns go down. But in order to obtain an excellent return in the long  term, an investor must have a clearly defined investing thesis. This can be just a few  sentences defining the precise investing strategy being followed.    An Sample Investing Thesis: “​This year, I will be implementing The ​Stable Dividend strategy​. I will be investing $5000 in  US large-cap stocks. These stocks must have a dividend yield greater than 2.5% and a  payout ratio of less than 50%. I will then pick the top 20 stocks based on those with the  highest debt-to-equity and ROIC. I will rebalance the portfolio monthly and invest an  additional $500 each month. ​This strategy has averaged a return of 11.75% over the past  20 years.​“    Before You Start Investing There are a few things the millennial investor should think about before getting started  with investing.    1. Have a six month emergency cash pile  ○ Perhaps an unforeseen life event comes up that needs  your immediate attention, or maybe you lose your job.  ○ Cash has its place – do you plan on purchasing a house, need to  pay tax at the end of the year, or need to pay for your child’s  education?  2. Pay off credit card or other high interest debt  3. Invest in yourself  ○ Is there anything you could purchase (education or otherwise)         that could increase your income? This might not be an immediate         gain, but more of a long-term play.  4. Eliminate your worst spending habits                          ○ If you want to increase the amount you can invest you can do             two things: Increase your income, or decrease your expenses  ○ Maybe you don’t need Disney+, Netflix, AND Prime Video?  5. Think about your time horizon  ○ When do you plan on retiring? 5 years or 40 years? You will want           to invest differently depending on the time you have until you need       it.  Remember, millennial investing takes time and you will want to  leave your investments as long as you can so that they can grow.  6. Max out your pension contributions (Roth IRA or other pension vehicles)                                                   

8. ○ No matter which country you are from, there are generally lots of  tax benefits on your pension plan. Make sure to take full  advantage of this and max out your contributions to your pension  each year!            Millennial Investing Strategies “The best strategy is the strategy you can stick with through thick or thin” ​– Dr.  Wesley Gray    There are three primary types of investing:    1. Fundamental investing  2. Passive Investing  3. Quantitative investing        Fundamental investing Fundamental investing is the purists form of investing. It involves digging deeply into  companies, reading their financial statements and potentially doing background  research on the management (scuttlebutt investing). While this form of investing will  likely yield better results than day-trading, it is seriously time-consuming and probably  won’t beat the market. In fact, 90% of fundamental fund managers have failed to beat  the market over the past 15 years. Indeed, over the past 20 years, fund managers have  averaged a return of just 4.67%! As Malcolm Gladwell discusses in his book ​Blink,  m​ore information doesn’t yield better results, in fact we often make better decisions  with a  fraction of the information.    Passive Investing Case study 1: ​CXO tracked the results of 6,582 predictions made by 68 ​investing gurus                 made between 1998 and 2012. Despite having some well-known names in the sample,             the average of the ​gurus ​accuracy (47%) didn’t beat a coin toss. Indeed 42 of the               gurus ​had accuracy scores below 50%.                                               

9. Case study 2: ​UC Davis professor Brad Barber studied the buy and sell  recommendations of Wall Street analysts. What he found was that the analysts' buy  recommendations underperformed by 3% per month, while their sell recommendations  outperformed by 3.8% per year!    Okay, so clearly the ​professionals ​are having a very hard time making any stock market             predictions. If the professionals can’t do it, why would the everyday investor even try?               If we can’t beat the market , why don’t we just match it!                                    This is why 45% of funds in the US are now passive. Investors are realising that most of  the time it is futile to try and beat the market using traditional means and flocking to  ETFs which track well-known indexes, holding a basket of stocks. ETFs are  distinguishable due to their low fees, performance, and simplicity. A well-known  example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index.          Indexing is a great strategy for millenials; it is simple to do and most of the time  performs better than picking individual stocks. Some of the biggest and best known  ETFs are:    ● S&P500 (SPY)  ● Total US stock market (IVV) 

10. ● NASDAQ 100 (QQQ)  ● FTSE Emerging Markets (VWO)  ● FTSE All World (VWRL)        A common way to invest in ETFs is to dollar cost average, whereby the investor invests  a set amount of money each month into the ETF. It aims to reduce the impact of  volatility on the new investment, and allows the investor to add a portion of their pay  cheque each month to their portfolio.    Quantitative Investing Quantitative investing is a systematic or rules-based approach to investing. It is the  search for above average returns using data. Historically, this form of investing has  been confined to sophisticated financial institutions or to those with deep data-science,  coding, and financial knowledge. Quantitative investing generally falls into two  categories: Day trading and factor investing.    Day Trading Trading is a speculative form of investing where a trader buys or sells securities usually  based on price patterns. This form of investing is not advised for most. 80% of traders  lose money, 10% break even, and 10% make money consistently. As Nassim Taleb  outlines in his book ​Fooled by Randomness, ​many of the traders who do make money  do so through random occurrences. There is a high knowledge barrier to entry in day  trading and a likeliness to eventually implode.    Factor investing (The Best Strategy for Millennials) Factor investing is the evidence-based, scientific approach to investing. It involves  targeting quantifiable characteristics or “factors” that can explain differences in stock  returns. This type of investing is best suited to millennial investing due to the  data-driven approach. The benefits of which include outperformance, risk management,  diversification, and less effort than fundamental investing or trading.    Factor investing is still new and quite unknown to the general public and is currently  going through massive growth and democratization. The factor industry is estimated at  $1.9 trillion and is projected to grow to $3.4 trillion by 2022. It has been growing at 30%  per year over the last decade.          

11. Quick tip #3: ​Aikido Finance ​is the leading resource for quantitative investment  strategies. Aikido supplies a catalog of evidence-based investing strategies which have  outperformed the market over the past 20+ years. These simple strategies help you  build a portfolio in minutes.    Lets look at some example factor-based strategies and examine their returns.    The Magic Formula: Joel Greenblatt quantified Warren Buffett’s methodology in ​The little book that beats the  market, ​creating what he called ‘the magic formula’. **The strategy ranks US stocks by  EV/EBIT (Value factor) in Ascending order and ROIC (Quality factor) in descending 

12. order. The strategy selects at least 20 companies and rebalances once per year. This  strategy achieved a 30% annual return between 1988 and 2004.    Quick tip #4: ​You can check out The Magic Formula Website to see the companies that  currently screen in the strategy. Similarly, you can check out Aikido’s Magic​ ​Strategy  which has increased analytics.    The Acquirers Multiple: Tobias Carlisle found in his research that using just the value portion of ​the magic  formula ​performed better than the entire thing. So, he curated the Acquirer’s Multiple, a  strategy which selects 20 companies with the lowest EV/EBITDA (Value factor)    Quick tip #5: ​You can check out The Acquirers Multiple website to see the companies  that currently screen in the strategy. Similarly, you can check out Aikido’s Acquirers  Strategy which has increased analytics.    OSAM Micro-Cap Value Momentum Strategy: James O’Shaughnessy wrote ​What Works on Wall Street, ​the bible of quantitative  investing. It catalogs hundreds of simple investing strategies and is a must read for the  aspiring quant. One of the best performing strategies in the Micro-cap Value  Momentum strategy. The strategy selects 25 micro-cap companies from the United  States with a price-to-sales less than one, positive three and six month price  momentum, and ranked by one year price momentum. This simple strategy has  returned an average of 18.1% since 1965.    Quick tip #6: ​I have set up a screener for this strategy which you can check out here. It  will give you the companies which currently fit the bill!    How to Find More Quantitative Strategies: Some other famous quantitative strategies include The Dogs of the Dow and the  Dividend Aristocrats strategies. But there are thousands of great quantitative strategies  out there. A nice resource for finding these strategies is the book ​What Works on Wall  Street , ​though you will need to then screen the strategy using Finviz or another online  screener. An all-in-one platform is Aikido Finance which has a catalog of quantitative  investment strategies, a built in screener, and the ability to create and rebalance your  portfolio all from inside the application. 

13. Original Source:​ ​https://learn.aikido.finance/millenialinvesting/