Investing is one of the most fundamental skills that every twentysomething should master. Why? Because it takes time for money to grow and as twenty-year-olds, we have the advantage of time on our side.
Being in this time of our lives means we have decades to make our money make more money. So, keep your expenses as low as possible and save as much money as possible before investing them. Once you have invested the money, forget about it. Do not touch it for decades so that it can slowly but exponentially grow into hundreds of thousands of dollars. Heck, by the time you retire at 65, chances are, you are already a millionaire. See why getting a head start is the best gift you can present to your future self?
“I am new to investing. How do I know what to invest in?”
As a starting point, you need to establish the amount of risk you are willing to tolerate. If you are in your early twenties, time is your best friend, and so you can perhaps take more risks than someone who is primed to retire.
One guideline worth following is to take 100 and minus that by your age in financial securities such as stocks, mutual funds, ETFs and index funds. So, if you are twenty years old, 80% of your equity should be invested in that basket of financial instruments. The remaining 20% should be allocated for bonds and cash. As you age, you can fine-tune the allocation of your investment portfolio.
“What should I start with?”
So, you have a decent amount of spare cash lying around, and you want to invest that amount of money, but you do not a single as to where to start your investment journey. May I suggest index funds or perhaps mutual funds for starters?
“Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.”John C. Bogle
An index fund is perhaps the most diversified investment you can ever have in your portfolio. An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index, such as the S&P500 or the Dow Jones.
If you look at the charts, you will see that the index has an upward trend. So, if you suffered a loss at any point, neither should you sell your holdings nor worry about it. Remember, time is your best friend, and if you leave it alone for decades, you are all set for life.
Mutual funds are commonly operated by a money manager. He or she chooses stocks and purchases them from the fund. They then well pieces of the fund to retail investors like you and me. It is another good way to diversify our investment holdings, but it is usually industry-oriented.
If you are hell-bent on investing, then stock picking might be your alley. Set up a brokerage account and do your own due diligence before you buy any stocks. Simply investing in a stock without doing your homework is no different than gambling at the casino. I mean it when I say that the stock market is neither a casino nor for gamblers and speculators.
“I have already invested in this stock, but the share price is going down. What should I do?”
“Invest for the long haul. Don’t get too greedy and don’t get too scared.”Shelby M.C. Davis
Calm down, desperado. Do you think each day in the stock market is a Saturday? If you think an unrealised loss of 1% is terrible, you have no idea what it is like to deal with a stock market crash. Back on September 29, 2008. The Dow fell 777.68 points in intraday trading. However, in the years that follow, most of the stocks that had their share prices dropped to the same extent regained double-digit percentage points.
The core lesson here is to stay patient. Day trading is not going to make you rich overnight. Investing your money in sound businesses or indexes will mean that you are bound to receive satisfactory returns on your invested equity over time. There will be times when the investment portfolio drops either by a bit or by a considerable amount. However, that is normal, and again, do not be disappointed if you have missed a favourable investment opportunity. It will come again—it is just a matter of time.
Final 2¢: Better Safe Than Sorry.
Investing is a tricky skill to master. There is a lot of things you need to learn in order to be a sophisticated investor. However, once you get the hang of it and master this skill, your financial literacy improves by a mile, and you can achieve financial freedom sooner than you think.
If you are interested in kickstarting your investment journey, you are going to need some basic resources. Check out resources like MorningStar, Yahoo Finance, Investopedia, or read books that touch on investment, such as The Intelligent Investor by Benjamin Graham. Once you are familiar with the fundamentals, you can set up an eToro account, in which you are able to interact with a virtual account loaded with $100,000 worth of virtual money. Put your knowledge to the test there and let time prove whether you learned the right stuff.
These tools and resources help you become a better investor, and as long as you do your own due diligence, you can see your financial portfolio grow steadily.