Do young investors need to fear 'dismal' returns? Not if they make 3 smart moves, experts say

"There are a lot of little things you can control. And in aggregate, they add up."


A recent headline of The Economist proclaimed that members of Generation Z — those born after 1997 — stand to make "dismal" returns on their investments.

The venerable financial publication is relaying projections from Credit Suisse, whose analysts forecast that Gen Z investors with a portfolio of 70% stocks and 30% bonds stand to earn an annualized 2% on their investments in coming years, about a third of the return earned by previous generations. An all-stock portfolio, they say, would earn just a 3% "real" return (which includes inflation), compared to a 7% return enjoyed by Boomers.

Financial experts generally agree that sky-high valuations in the stock market combined with ultralow bond yields dampen future return possibilities. But that doesn't mean that returns will be "dismal" forever or that Gen Z will be the only cohort to be hurt by meager returns, says Michael Moriarty, chief investment officer at Wealthspire Advisors.

"It's a fairly universal view that for the next 10 or 15 years, capital market assumptions are fairly anemic. Every generation is going to have to wear that 10-year view," he says. "But most people putting out these projections assume that after we revert to the mean, the next 10, 20, 30 years are going to be more robust."

In other words, the kids are alright, or they're likely to be, as long as they're patient and follow a few tried-and-true strategies to see them through some leaner years. Here are three smart money moves experts suggest you make.

Invest as much as you can as early as you can

When it comes to building wealth, Gen Zers hold a key advantage over their older counterparts: time. "It's so important to get started investing early," says Moriarty. "If you're young, you have a 40-year employment horizon. The power of compounding interest over that time is a huge tailwind."

Here's an example that can show just how huge the tailwind is. Say Credit Suisse's worst nightmares come true, and your all-stock portfolio earns just 3% per year for the next decade. If you're 21 years old and invest 10% of your $50,000 salary each year over that period, you end up with $59,000 by the time you're 31.

Then let's say you keep that same $5,000 per year investment from the time you're 31 through age 65, but things get back to normal and you earn the Boomer rate of 7% over that period. By the time they're strapping the gold watch on you, you have a whopping $1.3 million.

If you start from scratch when you turn 31, though, having skipped those anticipated years of "dismal" returns, you'd only wind up with $686,000.

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"Dollars invested matters a lot," says Jason Herried, senior vice president and director of equity strategies at Johnson Financial Group. "If you can build up your savings and then 10 years from now we start to get normal returns, you're going to be just fine."

His advice: Sock as much money as you can in a Roth IRA and in your workplace retirement account, making sure to contribute at least enough to get any matching contribution that your employer might offer. "Make sure you get that match," he says. "It's a guaranteed return on your money."

Don't swing for the fences

If you're worried that you may be facing muted returns in the coming years, it may be tempting to make big bets on risky assets in the hopes that the wager pays off, rather than sitting around and watching paltry returns roll in.

"Do I think that putting money in the bank, clipping coupons, and buying bonds is how this generation will build wealth? No," says Paul Tyler, chief marketing officer at Nassau Financial Group. But neither will piling into volatile investments, he says: "Swinging for the fences is never a winning strategy in personal financial management." 

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He recommends taking a diversified approach and owning a broad mix of assets that will behave differently in different market environments. That could include traditional investments, such as stocks and bonds, as well as nontraditional assets such as cryptocurrency. "You cannot at this point in time ignore digital currency, which has all the hallmarks of being an important part of our economy going forward," he says. "Not going to put 50% of your portfolio in there. Maybe it's 2.5% in some of these alternative assets."

The youngest generation of investors has the advantage of understanding what sorts of companies and technologies have the power to disrupt the established order of things, says Herried, whether it's alternative currencies such as bitcoin, or cutting-edge tech companies such as Roblox. He recommends that young investors establish a core portfolio of diversified mutual funds or ETFs before branching out with a smaller chunk of assets designated for investing in businesses with potential to pay off big down the line.

"Gen Zers have the time horizon to explore some of these investments," he says. "If they make a mistake on one stock, there's plenty of time to recover."

Keep your costs low

Investors can't predict or control the market, but by doing the right things at the margins, you can boost their returns over the long term, says Moriarty. "We can only control the little things," he says. "But there are a lot of little things you can control. And in aggregate, they add up."

The No. 1 thing investors control that contributes to the bottom line, he says, is costs. And Gen Zers enjoy an advantage here as well, thanks to a decades-long brokerage price war that has drastically reduced investing fees. "I remember my parents buying mutual funds back in the '80s, and they had to pay a 5% sales charge up front and a 1.50% expense ratio," Moriarty says.

These days, investors can trade thousands of exchange-traded funds and mutual funds without paying any transaction fee or trading commission. And ETFs allow investors to pay fractions of a percent to gain exposure to virtually any swath of the market.

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According to Morningstar's latest fund fee study, the average expense ratio for U.S. mutual funds and ETFs fell from 0.87% in 1999 to 0.45% in 2019. Over time, those fractions of a percent add up. If you invested $10,000 in a fund charging 0.45% in expenses and held for 50 years, you'd end up with about $235,000, having paid more than $16,000 in expenses. Bump the expenses to 0.87%, and your balance shrinks to $190,000, with a $28,000 bill paid to the mutual fund company.

And if you invested in, say, the Vanguard S&P 500 ETF, which charges just 0.03% in expenses? You'd end up with more than $290,000 with a price tag of just $1,291.

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