Now is an excellent time for an investor in their 20s to get into the market; they have many things going for them.
Investing early allows them to be better prepared for retirement. It’s hard for many adults in their 20s to think about retirement but thinking about it early could significantly impact their retirement lifestyle in a positive way. The power of compounding returns works in your favor the sooner you start investing – the sooner you have funds invested, the sooner those compounding returns can start building for your future.
Secondly, investing early allows them to weather the bouts of volatility the markets experience over time. Having a long-time horizon enables them to take appropriate risks, while also giving them time to recover after the volatile periods are over.
The consequences of waiting too long to start investing have the opposite effect. Waiting too long may jeopardize their ability to retire at the age and spending levels they would prefer. Waiting also reduces their time horizon, subsequently decreasing their ability to take equity risk and benefit from those market ebbs and flows as much as they could have.
Tips/rules for investing in your 20s
- Make sure you are invested enough: Adults in their 20s (especially lower 20s) are usually getting their first jobs and may have a little extra disposable income. Some are hesitant to invest their new wealth since they’ve worked so hard for it. The result is usually an over-allocation to bonds, which are typically less volatile, and an under-allocation to stocks, which may ebb and flow more. Your age and the stage of life you’re in dictates the ratio between stocks and bonds. A 20-something can allocate more to the equity markets compared to a 65-year-old retiree, because of that long-time horizon.
- Don’t get too gung-ho on trendy tips with your strategy: Investing and speculating are often used interchangeably, but they’re very different things, often with different results – which can be stressful! Keeping an eye on the long-term picture while avoiding speculative investments/fads should reduce volatility and, more importantly, stress.
- Make sure you are adequately diversified: Too often, younger investors gravitate towards individual stocks as opposed to ETFs or Mutual Funds. This is an OK strategy as long as they understand the benefits of diversification. It can be easy to think that by owning 5-10 stocks they are properly diversified, but diversification is defined by investing in many different industries and segments of the market. The benefit is that when one part of the portfolio falls, i.e. one industry isn’t doing so hot, there are others there to try to offset the losses. If all 5-10 stocks are in the same area of the market (social media, technology, energy, etc.), then the appearance of diversification is just a mirage.
Investing for a 20-something versus someone older
While younger, an investor in their 20s may have most of their money invested in the stock markets with no allocation to the bond, or fixed-income markets. Generally, this is appropriate assuming the investor has not yet gotten married, purchased a home, or started a family, etc. These and other major life events significantly impact the approach and methodology used for investing, as they mean a more stable cushion may be needed for current and future life expenses. But as these life events occur, and you get older, the allocation between stocks and fixed income (bonds) should shift to reflect the increased need for financial stability.
A common mistake that 20-somethings should avoid making
Not contributing enough to their employer’s retirement plan to receive the employer match is a major mistake to avoid. This is free money offered by the employer that can go towards their retirement goals. That means it can bulk up a 20-something’s retirement accounts from a very young age, and begin capitalizing on those compounding returns, setting them up well for several decades and into their retirement. Many 20-somethings would rather have a slightly larger paycheck and spend their money on things they’ve always wanted: a new car, a new phone, a new tv, etc. But if they spend money on temporary items, focusing only on the short-term and neglect to think about the long-term, they will be doing themselves a great disservice. Investing in your 20s can make a big difference. That large purchase today could actually have an impact on the type of future a young person would have if they’d started investing earlier.
Investing in your 20s can be a great start to build wealth over your lifetime. If you have a friend or family member you’d like to help guide, feel free to use these tips! And if you’d ever like to have a conversation to see how you could be more savvy with your financial management, connect with us anytime at 855-855-5455 or [email protected]. You can also check out our team members to contact one of them directly!