Young investors are in a better position to start investing earlier than any previous generation. Between the proliferation of low-cost investment products and accounts with no minimum investments, the barrier to entry has never been lower. With the luxury of time, you can afford to make a few mistakes, so long as you start early. Luckily, starting out in investing nowadays is pretty simple, with index funds doing much of the legwork on your behalf. So if you’re a 20-something, these seven simple rules for investing in your 20s will get you on your way to investing and preparing for a successful retirement: Avoid High Fees The rise of passive investing has ushered in a plethora of low-cost products across nearly every asset class. Yet, a surprising number of investors remained tethered to pricier products like actively managed mutual funds or structured products. This usually comes from investor ignorance about the fees they pay. For instance, while the average actively managed mutual fund has an expense ratio hovering around 0.62% and often eclipsing 1.5%, fund managers like Vanguard offer ETFs like the Vanguard S&P 500 ETF (ticker: VOO), which costs just 0.03% annually. Investors should note that fees, when compounded over time, make a staggering difference to long-term returns. Keep It Simple Simple is usually better, and that’s especially true for younger investors. While Wall Street loves to complicate investing to justify its steep fees, building a basic investment portfolio is typically a matter of allocating your capital to a few basic asset classes: stocks, bonds and short-term bonds. The magic of low-fee ETFs allows you to easily attain a stock portfolio based on the very index that most hedge fund managers fail to outperform, the S&P 500. When it comes to stock picking, there’s no harm in small allocations to individual stocks, but for the most part, investors should heed the wisdom of Vanguard’s founder John Bogle: “Don’t look for the needle in the haystack. Just buy the haystack.” Make an Investment Plan Just like strategies, investment plans should be pretty simple. The core of an investment plan hinges on two primary elements: the size and frequency of contributions to your portfolio. It can be as straightforward as depositing $100 into your investment account every month and choosing to allocate 75% to stocks and 25% to bonds. It gets even easier when such contributions are automated, turning periodic investing into a seamless habit. This regimented approach also comes with the benefit of creating budgeting discipline, subtly changing your spending habits to account for the contribution. In contrast, it’s easy to neglect investments without a plan, and your contributions become erratic. The busyness of life gets in the way and several months can go by before noticing that you’ve made no contributions to your investment account. Match Your Age to Your Allocation Young investors have a huge advantage: They have plenty of time until retirement, giving them the liberty to weather market downturns. With this in mind, young investors have the luxury of allocating a far larger portion of their portfolios to riskier assets like growth stocks. Older investors have tighter constraints. Retirement is nearing and they can’t risk a significant drawdown right before they begin withdrawing money from their portfolios. As a result, they have much higher allocations to low-risk assets like bonds. A classic rule of thumb is to align your age with your bond allocation. For example, a 25-year-old would allocate roughly 75% to stocks and 25% to bonds. While the strategy might be over-simplistic, it’s a great starting point to understand how allocations should change as you age. Keep Investments and Savings Separate During a strong bull market, investors often grapple with the temptation to start funneling more funds into their investment portfolios. While building your portfolio is great, it’s crucial to keep savings and investments separate. Investment capital should generally remain there until your “target date,” which for most investors is retirement. Investors often run into trouble when trying to “park” savings in the market with a short time horizon. Money set aside for objectives like buying a home, remodeling or other near-term purchases should be kept in savings. Because you’ll need the money relatively soon, these funds are better put in a high-yield savings account, money market funds or certificates of deposit (CDs). They offer modest returns while ensuring your funds are untouched and easily accessible for your future purchases. Start Early Starting to invest as early as possible is one of the biggest success factors for investors, often making more of a difference than your specific allocation. It’s the best example of the magic of compound interest at work. Let’s illustrate with a hypothetical portfolio, starting with $1,000 and adding $100 monthly until age 60, with a 7% average annual return. If you were to start at age 20, you’d have $254,536 by age 60. Conversely, starting at 30 leaves you with just $120,965 at age 60, essentially halving the portfolio. A head start also gives you more leeway to take more risk, as the longer you have until retirement, the longer you have to rebound from market downturns. Reduce Speculation The recent surge in social media-driven stock trends like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) have ignited massive interest in highly speculative trading, often in financially distressed companies, among younger investors. These trends have influenced many investors to concentrate a large portion of their portfolios on just a few highly volatile stocks. Ending up on the wrong side of one of these stocks can be deadly to a portfolio. For instance, for an investor to recover from a 50% decline, they’d need to double their portfolio. While there’s a place for speculative positions, especially in a young investor’s portfolio, they should only account for a small portion. When properly placed within the context of a diversified portfolio, these speculative stocks can add significant upside while only exposing a small percentage of the portfolio to volatility. Source link Post Views: 17 Post navigation One Magnificent Money Move You Must Make Before 2023 Is Over Investing evolves but some principles are evergreen, Charles Schwab reveals