Introducing Melanie, a Promising Millennial

Melanie graduated from college three years ago and is still on her first job. She has a decent apartment and an adequate car, but thanks to her barely-past-entry level salary and student loans, she’s stretching just to achieve her standard of living. She thinks she can’t afford to invest at all. But it really would be to her advantage to try to put aside something, whatever she can.

She may think she has to be a Risk-1, like Carl from the Condo, because she can’t afford to lose what little she has. But there are differences. She has very long time horizon; possibly 70+ years of life expectancy and, perhaps 5-10 years before even thinking about having children, much less paying for college (she’s just dating casually). Therefore, she can afford to be patient as market cycles play out and allow her principal to recover from periodic (and probably inevitable) periods of loss. Also, she really does need to build wealth; to accomplish her goal, she’ll need to reach for more return than she could expect to earn if she emphasized safety.

Sadly, some of her peers go too far in the direction of risk and expose themselves to significant and long-lasting (possibly permanent) financial damage. That, however, is why Melanie uses Portfolio123 models, which reflect a full understanding of the difference between being Aggressive (Risk Tolerance, – 5, which Melanie should consider) and being just-plain reckless.

She can add a bit of zest to her returns by investing through a tax deferred vehicle (e.g., an IRA) which would eliminate the annual tax drain. She in effect “pays” for that privilege through her willingness to tolerate penalties if she withdraws money before her golden years. But she’s only investing a bit and has no immediate major outflows, so she can afford to accept that.