Rich Grad, Poor Grad: Gaining Financial Foothold in a Millennial Economy

Reviewing millennial investment ideas and sharing my thoughts on the growing importance of accumulating capital.

Disclaimer: This post covers some of my observations relating to financial trends and asset allocation. The views and opinions expressed in this post are wholly mine and do not necessarily reflect the views of my employer. Assumptions made in the analysis are not reflective of the position of any entity other than my own – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold me to them in perpetuity. While every caution has been taken to provide readers with most accurate information and honest analysis, please use your discretion before making any decisions based on the information on this blog.

The roots of capitalism can be traced back to the Agrarian Age.

From the moment our distant ancestors cultivated the first patch of agricultural land, every civilization that followed was built on top of disposable capital. The ownership of arable land spawned enterprise giving rise to trade, employment, and collateral. Those with access to the resources were able to rent out the asset or provide loans to the borrowers in exchange for income and taxes. A domino effect followed as wealth was passed along generations creating factions within society across the entire history of mankind. Hence capital founded the platform for the evolution of barons, dukes, resource magnates and industrial age bankers at different points across the industrial revolution.

Capital creates capital. Through the hoarding of wealth across the ages a division was formed between the elite (owners of capital) and the middle and working classes (Those who rely on the elite’s capital for income to supplement livelihood).  With the highly affluent having prominent political influence and control over resources, years of favorable government policy has led to the wealth gap widening with the rich getting richer at the expense of the majority.

With that bit of exposition out of the way (Apologies for starting off with an introduction that sets up an Illuminati conspiracy theory ), I am of the opinion that even with its flaws, capitalism and enterprise have led to the betterment of society as a whole. Entrepreneurs have innovated and the desire to create has produced the two biggest achievements of our time in the form of globalization and the internet. Even if we consider the intentions of the innovators to be primarily selfish, the by-product of such ventures seeks to cater to our changing needs as a fledgling society. We need pioneers to guide our future.

As a new generation enters the workforce in the information age with enviable opportunity and access to more information than ever before, they stand at risk to suffer the consequences of economic mistakes of the previous generation that (without financial education) could see them experience a significantly lower quality of life and the gaps between social classes to grow even wider.

As mentioned in my previous blog, I highlighted that it was important for individuals to consider investing and saving from a younger age to acquire capital and avoid the potholes of a fractured economy. This post expresses my opinions on asset classes and investment ideas suitable for millennials.

Here are my thoughts on the following investment options-

Cash (Savings)
cash

Accumulating wealth through cash is a savings technique that has lived through the ages. In a world that seems to have less trust in it’s leaders than ever before, cash is widely considered as the safest haven for wealth accumulation.

The temptation to seek returns through making a deposit in a savings account would seem more appealing in countries which have a higher interest rate (the 6.5% rate in India seems far more appetizing than the 0.5-2% return one would receive having put away cash in the United Kingdom). Since compound interest is a force of nature, an initial investment would continuously compound across several years and eventually accumulate into a healthy sum in later years.

Local Governments may also provide incentives and schemes to encourage cash savings. For example, in the UK, the government provides the ISA (Individual Savings Account) which allows individuals an avenue to obtain cash growth which is exempt from tax.

As mentioned in my previous blog the impact of quantitative easing (government-led money printing) is not trivial. Cash tomorrow will be worth a lot less than cash today due to inflation. Frightening levels of consumer debt in Europe and Northern America prevents the respective governments making any brash interest rate policy changes which are likely to lead to more QE to stimulate demand in the future.

My personal opinion for someone who is relatively early in their career, and hence earning a low salary would be to use cash savings towards a deposit for real estate rather than a company pension scheme. Your money could be used in securing an asset that is almost guaranteed to appreciate in value over the long term regardless of the market situation (when observed historically, more on that later). A pension contribution would be more worthwhile when earning a higher salary in later years of career development.

With cash, it is easy to get the basics right. Learn to Budget. Limit credit card spending. Study the tax laws. Try to have other sources of income rather than placing reliance on salary alone. Living well within your means is obviously a key element in achieving financial freedom.

Real  Estate

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The immediate default wealth accumulation option for the traditional investor. After the hassle of assessing locations, sifting through online ads, arranging viewings, dealing with estate agents and paying intermediary fees, a house or a commercial property has the potential to provide a rental yield in the form of passive income over the course of several years and gain capital appreciation at the same time.(This process would vastly vary per country and the individual real estate and inheritance tax  laws involved)

Even though it may take a few years (depending on spending habit), acquiring a house gives the opportunity to attain equity and access to rental income. Larger properties provide the prospect to rent out rooms and attain income which can aid in paying off your property mortgage. Buy-to-let laws in certain countries would allow the individual to acquire entire properties which can be rented out to tenants (albeit at a higher interest rate). Rental properties periodically generate cash flow which is the fundamental trait of an asset while appreciating in value over the holding period.

Location is key. The key indicators of success for a  property would be it’s proximity to value drivers. These include large employer hubs, industrial centers, schools and access to major transport links e.g train/bus stations which would create a demand for tenancy and cause property value to appreciate. From a simple cash flow perspective, it is essential to have a constant demand from tenants to rent to.

Depending on the country of residence, it may be a wise move for young people to rent where they live and own a property in a region where they would like to invest (preferably with high rental yields and expected capital appreciation). The burden of home ownership has the potential to impact career choices in an age where millennials desire the flexibility to exploit job opportunities or spontaneous enterprise ventures. Such an option enables wealth creation and autonomy for the individual.

Additionally, there are property crowdfunding platforms available in certain countries which allow Investors to jointly own housing equity in the form of shares. This allows investors to gain exposure to property appreciation and the associated rental income through a smaller sized investment without committing large deposits or having to deal with intermediary costs. Due to the novelty of these financial products, the yield and risk trends relating to ownership over time are yet to be documented.

Equities

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Although current markets have a tendency to overvalue equity, there is still very good value to be found in stocks particularly within the small and mid-cap markets. These markets comprise of smaller companies seeking growth and investment. However with what we observed during the financial crisis, It is easy to understand why people would be hesitant to invest in an asset that is exposed to volatility ( In years gone by I have had my fair share of demo accounts. Watching in horror, mortified as my imaginary $1000 fell drastically to $930 over the course of a week).

To start off, thorough research would need to be performed on the sector that you are interested in investing. My research method, in line with the strategy mentioned in Star Principle by Richard Koch, would be to focus and study high growth future industries rather than studying a particular stock with high growth potential. High growth industries/niches have the power to leverage and sustain itself over a longer time frame. Whereas the high potential stock could have the future potential priced in (reflecting a higher share purchase price) and the risk of the company being exposed to one-off adverse extraordinary events. (Think back to Volkswagen in September 2015)

The research would initially summarize by analyzing the industry (specifically the particular trends that would lead the industry to grow). Ways to achieve this knowledge include reading financial news, reviewing financial statements to assess future growth prospects and reviewing online discussion platforms in the industry to observe community sentiment. For individuals who are foreign to financial statements, I recommend reading /familiarizing the following key sections for a company ;

  • Director’s report- This section highlight’s the management’s commentary on the year’s progress and discusses key drivers for the events pertaining to the entity in the current year and mentions future developments & important events since the end of the Financial Year.
  • Statement of Cash Flows – For a company, generating a positive cash flow and generating a profit for the year are two fundamentally different things. Even in dire financial straits, a company has the ability to soften the bleak financial outlook for investors by tailoring accounting standards and manipulating the profit figure.The cash flow statement is immune to tinkering. Assessing the cash position is the litmus test for identifying a company with astute trade practices and robust financial strategy. Years of negative cash flow for a mature company (early-stage companies are expected to hemorrhage cash during its initial years) should be a red flag that should alert investor’s to question management’s practices.
  • Notes to the financial statements- These sections describe the drivers of progress/failure in further detail by exploring Balance sheet and Income Statement components on a line by line basis. The Revenue & Cost of Sales notes within the PL help assess the factors for financial performance. Reviewing the Assets and Liabilities notes on the balance sheet would help assess the companies financial position and investment strategies.

This should give a brief insight into company valuations. I  will examine stock valuation methods for beginners in a future blog post.

Implementing some of these investment suggestions can be tricky in a globalized world where consumption is encouraged relentlessly through social media and Instagram culture. The process of building wealth takes time. Continuous learning is key to keep pace with new emerging opportunities.

On a positive note, capital does not solely refer to financial resources. With the rise of the internet, there is more opportunity than ever before to build social capital through personal branding and taking advantage of the growing influencer economy, an opportunity for millennials which I would like to share an opinion on sometime in the future.

As always, thank you for reading.

Until next time.

Yours truly,

Sree

 

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Author: sreenair23

Millennial finance blogger. Investor. Innovation Enthusiast. Thank you for visiting! : sreejith2308@gmail.com

One thought on “Rich Grad, Poor Grad: Gaining Financial Foothold in a Millennial Economy”

  1. Good article!
    “A pension contribution would be more worthwhile when earning a higher salary in later years of career development.”
    Depends on what you mean by worthwhile. As you say, getting on the real estate ladder is perhaps a more important milestone for young grads. But so is the need to think about how long do you want to work for, before you retire – a thought difficult to imagine before you are earning with all cylinders of your engine. But still a worthy financial planning exercise – especially to leverage your company’s pension matching scheme. Waiting for your highest income for pension contribution does not seem like the best strategy, especially considering income stagnation over the last few years.
    https://www.ft.com/content/8e324baa-c86f-11e7-ab18-7a9fb7d6163e

    Liked by 1 person

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