Getting started with investing at an early stage is one of the best gifts you can give yourself. If you're in your 20s, time is your biggest asset and there’s no better time to start than now. Time has the power to turn small habits into incredible results. The most potent combination for wealth creation is time and the power of compounding.
Here are some of the practices that would make your investment journey an interesting one.
Do not be afraid to take risks.
One of the common investment mistakes many investors make is avoiding risks out of fear. Investing your money in stocks can be riskier than keeping them in your savings account but in the long run,stocks have shown to be a much more rewarding investment. The general rule of investment is the lower the risk, the lower the return on investment. So bonds which are less rewarding than stocks can generally be lower-risk. This means, depending on your risk tolerance, you have a choice between stocks, bonds and other investment plans (not sure what your risk tolerance is? take this short quiz to find out your investor personality type).
Pay Off Your Debt
One of the major issues that makes investment for young people difficult is debt. Student loan debt coupled with car loan alone is a major issue. Debt reduces cash flow, a percentage of your income goes into debt monthly which reduces your chances of having extra cash for investment.
If you want to invest and still have debt to pay off, you would have to find a balance like paying a percentage of your debt off and investing the rest of your income. That will certainly allow you to take advantage of the compounding of income that investments provide.
One of the best investments you can make early in life then is to begin paying off your debts. Credit card debt is a good first target. They're usually the smallest debts you have but carry the highest interest rates. You would most likely not get up to the interest you pay on your loan monthly in your investment so it is wiser to pay off your debts before you consider an investment plan.
Take Your Time to Learn.
Young investors have the flexibility and time to study investing and learn from both successes and failures. Since investing has a fairly lengthy learning curve, young adults have a long time to study the markets and plan their investing strategies. Young investors also have the opportunity to absorb increased risk and overcome investing mistakes because they have the time needed to recover.
Diversify, but don't chase trends.
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk. Diversification is one of the most important concepts to master when investing in your 20s. Having a diversified portfolio that spans different asset classes can help with minimizing risk as you work towards your long-term goals.
Open a Retirement Account
An individual retirement account (IRA) is a tax-advantaged investing tool that individuals use to earmark funds for retirement savings. Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk. Those starting the process early have time to let investments mature, which is a critical and valuable piece of retirement savings. This is because of the principle of compound interest.
Making the decision to invest at a young age is one of the wisest and smartest decisions of your life because you won't just be providing yourself with the means to retire, but you will be creating a financial habit that leads to wealth. Typically, when it comes to investing, young investors have the time to recover if something were to go wrong and not just the time but also the opportunity to make riskier moves.