How To Get Started Investing In Your 20s
Starting investing in your 20s makes time your ally, allowing you to recover from any losses, but also giving you the chance to build up your winnings into something incredible. For example, if you started saving at 23, you could save a million dollars by 67, by putting away just $14 a day. Wait until you’re 30, and you need to save $21. The longer you wait, the more you have to save to invest. Starting young harnesses the power of compounding over a long period, making you richer than you could have been had you started later in life. Here’s what you need to do to get started.
Figure out Your Risk Profile
Investors are often blind to their own risk tolerance, and this leads to panic when things are going badly. You have to invest in assets whose risk matches your own. If an asset is so risky you aren’t sleeping well at night, you should sell it. You need something that you can be comfortable with.
In reality, most investors are more conservative than they think they are. In fact, I’d go as far as to say that most people who say they are risk-seeking, don’t mean it. Here’s an example: you have $100, and a 50% chance of turning it into $150, and a 50% chance of losing $50. On the other hand, you could invest in an asset that has a 50% chance of turning it into $110, and a 50% chance of losing $20. Which investment would you buy? A lot of people think they’d pick and just might do that, but most of those people don’t understand the consequences of their decision. You see, once you’re down 50%, you need a 100% return just to get back even. In the world of investing, you get punished for losses more severely than you are rewarded for gains. Understand your risk tolerance. A Frontline documentary exposed how many people who suffered losses in 1993 had still not recovered by 2014, when the documentary was made.
Keep Your Costs Low
Fees are the enemies of returns. You want to hammer down your investment fees. The lower the better. On the face of it, fees can seem trivial. What’s the difference between 1% fees and 3% fees? A fortune. Here’s an example. If you start paying $18,000 into a 401(k) from the age of 21, increasing your contributions every year by 2%, until you’re 50, when you increase your annual contributions by the IRS-defined “catch up” amount, and then stop contributions at 65, earning 6% a year in returns, you’d face the following scenario.
Source: Daily Capital
If you paid 1% in fees over that period, you’d make $2,620,504, and if you paid 3% in fees, you’d earn $1,878,758.
This is why index funds, such as exchange-traded funds (ETFs) that track the S&P 500, or Russell 3,000, or some other index, do better than most active investor funds. The difference between the two is $740,000! Another great, low-cost investment vehicle is in the form of gold IRA companies. It has the benefits of a 401(k), and has the added advantage of being tax-deferred or tax deductible. Not only are you saving on fees, you get to reinvest those taxes you don’t have to pay, like a loan from the government. Meanwhile, you’re invested in gold, which is the best performing asset for inflationary periods.