Long-term investing can benefit Gen Z. Here’s how

Starting young has its advantages

Despite the roadblocks ahead, you are still in a unique position to make your mark, both professionally and with your investment portfolio. Having time on your hands allows for opportunities not available to other generations. “It’s about really capitalizing on being young,” offers Dziedziejko.

For starters, you can take more risks with your portfolio. You could buy high-value stocks and take a passive strategy. You can also be quite flexible. You can make mistakes, learn from them, regroup, and then start over. “It’s not like there’s one linear trajectory, a defined path, that leads to success,” adds Dziedziejko.

Keep in mind that time is often forgiving as well. No other generation has that much freedom. So go ahead and seize the opportunity. Take risks and learn from the good, bad and ugly. It’s okay to make some mistakes along the way.

Strategies for long-term success

Now that we understand the landscape for Gen Z, let’s dive into what the most effective investment strategies for this uniquely positioned group are.

We’ve outlined 6 that could help you take the next step toward financial sustainability.

1. Have a systematic investment plan.

Set up a direct withdrawal from your bank account once you've secured your first employment, whether full-time or part-time, or any other source of income. A continuous savings plan (CSP) is a pre-authorized withdrawal of funds from any account that is then deposited on a regular (typically monthly) schedule into a savings or investment account.

This strategy will not only establish a healthy habit of regular investing that will pay off in the future, but you will also gain the powerful benefits of dollar-cost averaging, a smart strategy that will help you overcome your fear of volatile markets. Investors can cut their average cost per share while minimizing volatility in their portfolios by investing a set amount at regular intervals - regardless of price.

Any investor can take advantage of dollar-cost averaging, but beginners may find it a particularly beneficial tool. Even more enticing, adds Dziedziejko, is the fact that “it’s a passive strategy so you won’t notice it as much.”

2. Embrace compounding.

Starting your investment journey early also allows you to benefit from a phenomenon known as compound interest. The term refers to the interest calculated on both the principal and the interest payable or earned on that principal. In other words, the earnings from an investment are reinvested to generate even greater earnings. Therefore, the earlier you begin investing, the sooner you may reap the rewards of compounding.

This strategy is also compatible with the long-held guidance to reinvest dividends. Dividends are typically distributed to shareholders via check or direct deposit into their accounts. On the dividend payment day, a dividend reinvestment plan (DRIP) allows investors to reinvest their cash dividends into additional shares (or fractional shares) of the stock. The idea is for investors to compound their returns over time by acquiring more shares, which provide dividends that are reinvested. Win-win-win.

3. Focus on savings too.

Compounding is also essential to another strategy: savings. Your financial path might also benefit from how and how much you save when you start investing early. Open a savings account. The money you put in it will grow, and then grow again, as the compounding effect of interest-on-interest leads will snowball into more wealth. This is proof of how much impact compound interest can make on your wealth-building strategies when you learn to embrace it.

4. Don’t try and time the market.

Investing will certainly test your nerves. But don’t let that fear influence your decisions. Avoid the temptation to sell when times are low. You’ll find little success trying to time the market. Most investors who try to quite often end up losing money in the process. Keep in mind that the mantra of “catching the tops and bottoms” is far too often a losing approach. Don’t do it.

5. Take advantage of government tax benefits.

Investing gets harder when children come into the picture. Suddenly you find yourself facing a significant rise in expenses and long-term goals get shoved aside for short-term ones. To counter that reality, make sure to use the government tax benefits at your disposal, advises Dziedziejko. They’re substantial in impact and offer long-term benefits. To be sure, your future family may also be a good reason to start investing early. That way you’ll already have established healthy habits before your life takes a turn. More on that below.

As investing tends to get harder once children are in the picture, you can counter that reality by using the government tax benefits at your disposal. Dziedziejko advises that they are substantial in impact and offer long-term benefits. One of the reasons for investing early on in your life is that your future family can also reap the rewards because of it. This way, you will have already established healthy habits before your beautiful additions to the family.

6. Educate yourself.

While you may be known as digital natives, don’t let online resources and social media be your only guide to investing. Go out there and educate yourself. Ask a lot of questions. Do a lot of reading. Sign up for a course or two. Seek advice from credible sources, whose acclaim goes beyond two-minute videos.

Take a tour of the BMO Investment Learning Centre. Watch some videos. The Course Overview is a good place to start. Dig deeper into Risk Tolerance and Time Horizon.Then ask more questions. Remember: we’re here to help at any stage of your investment journey.

Additional tips

Set goals

When it comes to investing, it's natural to feel overwhelmed. While education is important for making informed decisions, setting goals can help you get there faster. Even if your goals are vague, merely setting them - for example, 'I want to retire with $1 million at 60' - can prove to be very effective and powerful, according to DziedziejkoOnce you've settled on a goal, use online tools to figure out what you need to do today, tomorrow, and every year to make it a reality. Use a financial calculator to figure out how much you need to save each year to accomplish your goals.

Start the work before children arrive

Once children enter the picture, everything changes and your focus will shift. Your mental capacity for dealing with anything beyond your kids will diminish significantly. Your budget will start to feel more restrictive, and you will no longer feel the same level of freedom to invest your money without feeling a bit selfish, or guilty.

But if you’ve put some investment strategies in place from early on, it’s a lot easier to continue along that path even when you find yourself facing a more challenging time financially. That’s the benefit of habits, shares Dziedziejko. “If it’s already passive and built into your life, and your portfolio, it should make the next steps much easier."

Taking that first step can sometimes be the most difficult. But once you’ve moved forward, you’ll be so glad you did. The good news is you don’t need to do it alone. Get started today by exploring BMO’s Online Investments options. Reach out to our advisors with any questions you have. Smart investing is one click away.