Stock market declines are never pleasant, but they can be especially hard for young investors that lack experience. In fact, about 20% of Generation Z and millennial investors actually closed their trading accounts during the 12-month period that ended in September 2022. In many cases, that decision was likely influenced by losses suffered as the stock market soared during the post-pandemic rally and then collapsed as economic conditions deteriorated.
But social media puts young investors at an even bigger disadvantage. The sheer volume of financial misinformation readily available on most social platforms is staggering, and separating the sensible opinions from the nonsense can be difficult. Professional advisors are generally judged on past performance, but social influencers are judged on followers and likes, regardless of whether they offer good advice.
That puts Gen Z investors in a very difficult spot. Many have suffered sizable losses in stocks and cryptocurrencies during the current bear market, and most are constantly bombarded with financial advice of questionable quality. But avoiding the stock market is not the answer.
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The secret to becoming a stock market millionaire
The most important thing Gen Z investors need to know is the stock market, no matter how discouraging in the short run, has consistently created wealth over long periods of time. The S&P 500 index -- commonly seen as a benchmark for the U.S. stock market -- has endured seven bear markets and seven recessions in the last five decades, but it has still produced a total annualized return of 10.3% during that time period.
In other words, the secret to making money in the stock market is a long-term mindset. To quote legendary investor Warren Buffett, "The stock market is designed to transfer money from the active to the patient." Unlike many prominent social influencers, Buffett has an astounding track record that makes his investing advice particularly credible. His knack for picking good stocks has made him one of the wealthiest people in the world, and it has helped Berkshire Hathaway become one of the largest companies in the world.
Buffett has frequently recommended an S&P 500 index fund. In fact, he believes the "know-nothing investor" can actually outperform most investment professionals by periodically buying an S&P 500 index fund. In other words, Buffett is saying the average person -- one with absolutely no knowledge about the stock market -- can realize greater returns than most money managers without doing any work. Gen Z investors should take that advice to heart.
The Vanguard S&P 500 index fund
As discussed, the S&P 500 is a good barometer for the broader U.S. stock market. The index measures the performance of 500 large-cap U.S. stocks, the crème de la crème of corporate America, and its constituents span all 11 market sectors. The Vanguard S&P 500 ETF (VOO +1.13%) is an index fund that tracks the S&P 500, allowing investors to spread their capital across a diversified mix of blue-chip American businesses.
Buying an index fund is certainly less exciting than buying individual stocks or cryptocurrencies, but it gets results. As mentioned, the S&P 500 produced a total return of 10.3% annually over the last five decades. At that pace, $150 invested weekly in the Vanguard ETF would be worth $1.3 million in three decades.
Gen Z includes anyone born between 1997 and 2012. So the oldest Zoomers are turning 26 this year, which leaves them with roughly 40 years until retirement. That is more than enough time to become a stock market millionaire, even for those who cannot afford to invest $150 each week.
The chart below shows how different weekly contribution totals would grow over the next four decades, assuming an annual return of 10.3%.
|
Investment |
$50 Per Week |
$75 Per Week |
$100 Per Week |
$200 Per Week |
|---|---|---|---|---|
|
10 years |
$42,000 |
$63,000 |
$84,000 |
$168,000 |
|
20 years |
$154,000 |
$231,000 |
$308,000 |
$616,000 |
|
30 years |
$452,000 |
$679,000 |
$905,000 |
$1.8 million |
|
40 years |
$1.2 million |
$1.8 million |
$2.4 million |
$4.9 million |
Chart by author. Dollar totals assume a 10.3% annual return.
What about individual stocks
Investors with no market knowledge and no desire to learn should stick with an S&P 500 index fund and avoid individual stocks. But anyone who enjoys researching businesses should consider building a portfolio of individual stocks and an S&P 500 index fund. That is my personal strategy.
As a millennial myself, I have several decades until average retirement age, so I'm comfortable allocating a large portion of my wealth toward individual growth stocks. But I still keep a good chunk of my money (about 25%) in the Vanguard S&P 500 ETF. I view the index fund as a safety net. Even if I'm wrong about every single stock I own, I see the Vanguard S&P 500 ETF as a guaranteed money maker.
Of course, nothing is actually guaranteed where the stock market is concerned, but the S&P 500 is pretty darn close. In fact, the S&P 500 has produced a positive return over every 20-year period since 1919. That means any investor that bought an S&P 500 index fund during the last century made money as long as they held that index fund for at least 20 years.
