When it comes to getting started with investing, there's no time like the present. If you're a 20's, time is your biggest asset.
When you think of your 20's, investing is not one of the first things that come to mine. For me, it was the carefree wonder and all about making the most of the experiences before I took on the traditional roles and responsibilities that naturally come with the next decade. When I started doing more research about investing, I realised how valuable investing early on is. Illustrated below, beginning to invest at 30 could mean that your future value is half of what it would be if you started investing ten years earlier at the age of 20.
It cannot be overstated how valuable your 20's are in laying the foundation for the kind of lifestyle you wish to have at retirement. Here are the top tips on how you should approaching investing in your 20s.
Just start—the power of compound interest by investing early.
It may be the most straightforward tip for how to invest money in your 20s, but it's one of the most important. Compounding works exponentially on itself. That means someone who starts investing earlier could end up with a lot more money when it comes to retirement than someone if they started a few years later.
Compound interest is interest computed on an original principal and accrued interest. To put it merely, compounding interest, is interest on interest.
Let's say you invest £300 per month starting at age 20 and don't stop until you're 60-years-old. If you managed a 9% return during that time (actual historical average of the S&P 500 index), you would have £1,216,377 in that account alone. Now let's say you waited until you were 30 to get started. By the time you reached 60-years-old, you would only have £490,707 in your account. Those first ten years you missed out on would cost you £725,670 in returns – even though you only skipped £36,000 and ten years of deposits!
As illustrated, the effect of compounding is more powerful over a more extended period as the amount of earned interest becomes larger and larger. The magic of compound interest, a phenomenon Albert Einstein said:
"Compounding is the 8th wonder of the world. He who understands it, earns it. He who doesn't, pays it."
Related articles:
Make risk your friend
As a young investor, you should be concentrated on growth-oriented assets. That's because in the decades ahead of you, you can take advantage of compounding of much higher rates of return on growth investments than you can get on safe, interest-bearing ones.
Many investors make the mistake of avoiding risk even though it helps them over a long time frame. Reaching a million would require a reasonable allocation toward stocks; while investing in stocks can be riskier than say, putting your money in a savings account, over the long run stocks have shown to be a much more rewarding investment. While the stock market can be volatile, they are still a good choice if you're young as you have plenty of time to weather the current stock market highs and lows.
As an example, if you were to invest £10,000 at age 25 in a term deposit savings account paying an average annual rate of return of 2%, you'd have £22,080 by age 65.
But if you invest the same £10,000 at age 25 in S&P 500 index funds producing an average annual rate of return of 9%, you'll have £314,094 by age 65. That's more than 20 times as much as you would have if you invest the same amount of money in savings!
Just be sure only to invest money that you don't currently need. When you invest in a stock, you'll probably see drops in the short term. That's why the market is generally a no-go if you need the money within five to ten years. But history shows us that, in the end, you'll come out ahead for long-term financial goals such as retirement.
Investing may also help protect your portfolio from the negative effects of inflation, which can cause your money to lose value every year. Read the article here.
Related articles:
Keep it simple with index funds or ETFs
One good way to invest in stocks or bonds is through exchange-traded funds or index funds. An ETF is a basket of individual holdings (e.g. stocks, bonds or commodities) that aims to track an index and are traded on an exchange. When you buy an ETF, you are purchasing the underlying shares of all assets per their weights in the index (the 'weight' is derived from a company's market capitalisation). For instance, an ETF tracking the S&P 500 will buy all the stocks in that index according to their index weights. These 500 companies make up about 80% of the total value of the US stock market.
Related articles:
This isn't an argument against cash. You should have a sufficient amount of cash sitting in an emergency fund to cover at least three months of living expenses. That gives you a cash cushion should you either lose your job or be hit by a bunch of unexpected expenses.
Unsure where to start, finding a Robo-advisor is a great way of keeping it simple, optimising your returns for minimal fees. Robo advisors are digital tools that provide automated, algorithm-driven financial planning services and decision making with very little human supervision and a much lower cost. Robo-advisors are growing in popularity as they tend to charge a fraction of what a traditional investment manager would whilst getting the same, but if not better portfolio at the same time.
Related articles:
Don't miss out on free money
For your long term investment goals such as retirement, it is always good to look at the option of tax advantage retirement accounts. The name differs for each country, but for example, Individual Savings Accounts (ISA) in the UK or Individual Retirement Account (IRA) in the US. These type of accounts, allow you to withdraw up to a certain threshold tax-free (i.e. capital gains tax) as an incentive to invest for the long-term. Most investment providers, including Robo-advisors, will have these saving account options. These accounts will have their own trade-offs, unable to withdraw until a certain age or buying a house or lower interest rates so ensure you do your own research.
Invest with a plan
Proper planning is one of the key ingredients for how to invest successfully. It includes outlining your investment strategy, your contribution rate, how often, and what you hope to achieve with your portfolio. Tailor your asset allocation to help you reach these goals. Saving for retirement should be a higher allocation in growth-orientated investments such as the stock market but for goals under five years investment more conservatively less in the stock market and more in bonds. When considering asset allocation, keep your personal timeline in focus.
Related articles:
The key takeaway, start investing early!
Information provided by goBuoyant is general in nature and does not take into consideration your personal financial situation. It is for educational purposes only and does not constitute formal financial advice. Remember, the value of any investment can go down as well as up.
Comentários