Millennials' Money Questions: They Asked; We Answered

By Danielle Maddox

After many millennials watched their parents suffer financial setbacks during the Great Recession and experienced their own challenges entering the workforce, Generation Y has adopted a cautious attitude toward investing. According to a January report from financial services company UBS, which surveyed more than 1,000 people ages 21 to 29, millennials keep 52 percent of their money in cash on average, and only 28 percent think investing will make a substantial difference in their financial situation.

In May 2013, Wells Fargo (WFC) released a survey that explored the financial behavior and attitudes of young adults. The online survey included 1,414 millennials between ages 22 and 32 and 1,009 baby boomers between ages 48 and 66 for comparison. It reported that two-thirds of millennials believe, despite joining the workforce in a worse economy than the baby boomers, that they will achieve a greater standard of living than their parents.

U.S. News recently fielded questions through Facebook (FB) and Twitter (TWTR) from young adults about where and how to invest their money, then solicited advice from financial experts.

1. "Which markets should I focus on as a new investor?" -- Nicholas Frazier, 21, a student in Ames, Iowa.

As a new and inexperienced investor, you should diversify your investments to minimize your risk of loss. Simon Moore, chief investment officer at Future Advisor in San Francisco, recommends that you look into both developed and emerging markets to gain broad diversification in your portfolio. Exchange-traded funds offer an easy, low-cost way to achieve diversification since you don't have to pick the individual investments yourself.

%VIRTUAL-article-sponsoredlinks%If you're investing for the long term, your portfolio should have a significant allocation to stocks, since stocks provide much better returns than bonds over a long period. Moore says a good rule of thumb for the percentage of stocks you should have in your portfolio is 100 minus your age.

It's also important to include an allocation to bonds, which can act as a cushion when the stock market experiences volatility. Moore recommends dedicating a small slice of your portfolio to real estate investment trusts to reduce overall risk. This combination of investments, Moore says, should give you a solid footing.

2. "Should I invest in the stock market or pay off student loans?" -- Laurie Wang, 28, a digital strategist and entrepreneur in New York City.

There isn't one correct answer because it depends on your financial situation and the nature of your student loans. According to the Wells Fargo survey, 36 percent of millennials consider student loans to be their most pressing financial worry. Generally speaking, it's a good idea to work on paying off your student loans while you invest in the stock market for retirement. Richard Sturm, a financial adviser at Sturm Financial in Seal Beach, California, says, "Investing in the stock market and investing in retirement can be one and the same thing." He recommends that millennials survey their workplace retirement plan options as a means of investing.

One factor to consider before you make the decision to invest, however, is interest rates. Moore says if your student loan interest rate is less than your expected return on your retirement savings, you should start investing while you pay off your loans. The higher your loan interest rate is, the sooner you should pay it off. Moore says if the interest rate on your loan is less than 4 percent, you can slowly pay it back while you begin investing for retirement.

Also make sure to take advantage of matching contributions from your employer through your 401(k), says Ellie Kay, author of "America's Family Financial Expert." If you work for a company that offers this benefit, she recommends at least investing enough to capture the match.

3. "What should I do with the $10,000 I have to invest?" -- Amber, 22, a model and writer in Chicago.

First, you'll want to put some money in an emergency fund, which should ideally cover living expenses for six to nine months. This fund will cover unexpected expenses, including major car repairs or hospital bills, and it could become especially important during unexpected periods of unemployment.

The decision to invest in bonds, stocks and other asset classes should depend on your financial goals and how much you're willing to risk. In terms of retirement investing, David Williams, director of planning services at Wealth Strategies Group in Cordova, Tennessee, says the best choice is to have both a Roth individual retirement account and a 401(k). "Roth IRAs have tax-free distributions, but you are limited to $5,500 per year contributions ... the 401(k) contributions are tax-deferred. You may contribute up to $17,500 annually, and you may gain employer matching. Combining both is a better answer for retirement planning," he says.

4. "How can I invest in real estate if I am early in my career without tens of thousands of dollars?" -- Aaron McDaniel, 31, a corporate manager and entrepreneur in New York City.

Moore says REITs are a great way to broaden your portfolio. ​REITs are funds that invest directly in real estate through properties and mortgages and receive unique tax considerations. They can be risky, however, and should only make up a small portion of your financial assets. Laurie Itkin, a financial adviser for the Coastwise Capital Group in La Jolla, California​, says it is wise to make REIT index funds 10 percent or less of your portfolio. She says although REITs can yield high returns, they are more volatile because they are heavily affected by real estate prices.