Investing is one of the most powerful tools that a twenty-something can use. Why? Because we have so, so, so much time on our hands.
We are in our twenties, which means we have decades to grow our nest eggs. Be warned though — to grow something, you have to have something to grow. This is exactly why you need to start investing as soon as you possibly can. Start saving money and then invest it, and leave it alone. Leave it alone for decades so that it can grow into hundreds of thousands of dollars… maybe even millions. Starting early is the best gift you can give your future self.
So how do you know what to invest in?
Well for starters you need to determine your risk profile. If you’re young with time on your side you can probably be more risky than someone who is gearing up for retirement.
A good rule of thumb is to put 100 minus your age in equities such as stocks, mutual funds, ETF’s and index funds. The rest goes into bonds and cash. As you get older you can readjust the allocation of your portfolio.
For example, at age 20 with $100, you would want to invest 80 percent — in this case, $80 — into equities. The other 20 percent — in this example, $20 — you would want in bonds and cash. At age 30, you would want 70 percent of your investments in equities, and the other 30 percent in bonds and cash. Make sense?
What should I start with?
If you have a bit of money sitting around and you don’t really know where to begin with investing, Index funds or mutual funds are probably they way to go.
An index fund is basically the most diversified investment you can hold… you hold a piece of an entire index, such as the S&P500 or the Dow Jones. Over the long haul the index typically has a upward trend so as long as you aren’t fretting everyday if you see the balance drop a little you should be golden.
Mutual funds are managed by a fund manager. He or she picks stocks and purchases them for the fund. They then sell pieces of the fund to individuals like you and me. It’s another great way to diversify, but it’s typically industry specific.
If you are really into investing then stock picking might be for you, open a discount brokerage account, and DO YOUR RESEARCH before you buy any stocks.
It’s okay if the value goes down.
You remember 2008 right, when the the stock market dropped percentage points in the double digits? Well what people typically leave out is that the majority of the stocks that dropped that much regained double digit percentage points in the years to follow.
Be patient. Day trading isn’t going to make you rich unless you really know what you are doing. Buying investment in established companies or indexes will mean that over the long term you will see decent returns. Sure, there will be times when your portfolio sees a bit of a drop, but that’s okay there will be lots of other times when your investments will soar.
Investing can be scary, it’s complex, but it’s an important tool you need to grow your wealth. If you are looking to start investing check out resources like Yahoo Finance, make a mock portfolio on MorningStar or pick up an investing book like Lesley Scorgies Rich by 40. All of these are great resources and as long as you do your research you will be well on your way to building your nest egg.