You’ve heard of the saying: the early bird gets the worm. This is also true when it comes to investing because if you start early, you have a better chance of success. Compound interest becomes your friend because it can help your money grow exponentially. So, if you start investing in your 20s instead of in your 50s, you’re more likely to end up with many times the amount you started with as a young investor. By the time you’re supposed to retire, the little amount you’ve put in at age 23 or so, will already be a sizeable asset.
Here are a few tips for those in your 20s-30s to get a flying start on your investing journey.
Think simple but start early
People naturally become envious of other investors who strike it rich when their stock’s value suddenly goes through the roof. Or maybe you know of somebody who invested all the dollars they’ve got into Bitcoin and became overnight millionaires. These “Cinderella” stories can rouse the excitement in you – that’s all normal. But, remember that these people took risks and gave it time before they got their rewards. As a novice investor, it is wise not to go all out in the beginning. It’s a decision that many investors learned very painfully. Many people think that foresight and hindsight are the same but they’re totally opposed to each other in investing. For example, you might find ETFs and index funds unexciting, but in all probability, they will likely outperform the market. If you’re the type of person who can take a whole day just thinking about whether to buy/sell with a small amount of money, you probably won’t be able to move forward successfully.
As we’ve said, the boring stocks don’t create any ripples in the market because they don’t go up or down like a preschooler who had too much sugar. They just plod towards one direction ever so slowly. But behind them, the power of compound interest is at work and it’s taking you far without you realizing it. Not convinced? Well, if you have $5,000 today and you put it all in an index fund that grows 6% each year, you’ll have about $50,000 in 40 years. This proves that time is money. If you don’t get in, you lose each year, and that would substantially lessen your future payout. If you invest early, you will have the capability to retire early. But those who invest later in their lives might have to work longer or harder before they can have the confidence to hang up their gloves.
Understand your risk tolerance
Risk tolerance is the limit of risk that you can comfortably deal with. It is a psychological trait whose definition comes from your DNA, but there’s no denying that your education, income, wealth, and past experiences influence it. When these factors increase positively, your risk tolerance follows suit. However, as you age, it risk tolerance typically goes the opposite way and decreases because you naturally tend to play it safer. You can also define risk tolerance as to how you feel about risk and the level of peace or anxiety that you feel when you perceive a risk to be at hand.
When you know your risk tolerance, you can adjust your strategies accordingly. You may try to keep away from investments that you think will give you reasons to worry. A good rule to follow is not to buy assets that may rob you of peace and give you sleepless nights. An anxious investor would later become a fearful investor who will make emotional decisions rather than logical ones. Even when there is financial uncertainty, level-headed investors maintain a cool head and sticks to an analytical decision process. In the end, they usually come out ahead.
Consider Roth IRA
If you are already contributing to a workplace retirement plan, it doesn’t mean you should stop there. You can still contribute to a Roth IRA as long as your household income is within the annual limits. For married persons filing jointly, they can put in the maximum $6,000 to a Roth IRA in 2019 provided that their household income falls below $193,000. For single individuals, they can give the maximum if their income is under $122,000. There’s no tax deduction on the contributions, but in return, your money will grow free of tax (including gains on your stocks), after five years have gone by since your initial contribution.
If you’re already putting in money in a workplace retirement plan but want a tax break on your contributions now, you can invest a maximum of $6,000 in a traditional IRA in 2019. You simply deduct that amount from your tax return. This is available to you only if your household income is under $103,000 if you’re married filing jointly, or $64,000, if you are single.
Paying off high-interest debt
You may not classify this as a traditional investment strategy, but it makes sense to have a plan to pay off all your debts, preferably when you are in your 20s.
In other words, when choosing between investing in an instrument that will give you 7% per annum and retiring a credit card that accrues 15% per year, the latter is the better financial choice. This does not mean that you begin investing only when you’ve erased all your debts. If you think about it, you might be better off keeping some debts with low-interest rates. The key is to get rid of all your high-interest rate debts before focusing on other investments.
Control Your Emotions
Interestingly, the biggest hindrance to market profits is the investor’s failure to check his or her emotions and lets it get in the way of making sensible decisions. When you look at the prices of assets at a particular moment, you might say that you’re looking at a picture of the collective emotions of the whole investment community. When the greater number of investors worry about an asset, its price is likely to plunge. On the other hand, when they perceive that the company’s future is looking bright, its current price swerves upward.
Asset prices that move opposite to the investors’ expectations usually spawn tension and foster insecurity. Should you get out now and avoid a loss? Should you hold on to your stock and hope that the price makes a turn-around? Should you purchase more?
Even when the price is going as you have projected, that still doesn’t settle everything. In this situation, should you sell now and make a profit before the price goes down? Should you keep the stocks for the moment since there is still the possibility that the price will go up? These questions will fill your mind as you monitor the current movement of the price. Ultimately, it will build to a point that compels you to take action. But since it’s likely that emotions will propel your decision, the probability of making a wrong one is much, much higher.
You should only buy an asset after doing everything to make sure that it is a good buy and that your expectation of its price direction is reasonable. Early enough, you should benchmark a price or time at which you will sell your stocks. This is even more necessary if you find you made an erroneous projection or when the assets don’t perform as expected even when some of your projections become true. What we’re saying is, clarify your exit strategy even before you buy the asset and execute that strategy no matter how you feel.
Don’t be afraid to be aggressive
If there are investors who eat a double serving of risk for breakfast (such that they invest everything in individual stocks), there are investors who are far-out conservative when they invest. Perhaps you think that the best investment is to keep all your money in a Certificate of Deposit (CD) — well, that is a terrible way to invest and try to make a profit.
There’s no doubt that these are safe investments, but because of this, the banks offer a very, very low-interest rate on your investment. In truth, the returns you can get are so low, they won’t even let you keep abreast with the inflation rate. Ultimately, you end up actually losing money over time with these flat investments.
What will happen if you invest 20% of your income every single month? You will grow your wealth consistently and possibly, exponentially. You can arrange for your bank or company to automatically take out the amount from your paycheck and put it directly into your investment accounts. Doing this will instill the discipline that you need to steadily save and invest over time.
Losses? Don’t Panic
If the recent backslide of the stock prices affected you, you should think about re-aligning your portfolio to reduce the percentage of stocks. Investors who are not very fond of taking so much risk will probably want to prepare in case there’s a continuous decline in stock prices, especially if it turns into a bear market. This is when the prices go down 20% or more. They should lower their stock allocation immediately. Just a mere 10% to 20% adjustment would be more advantageous than going “all-in” or “all-out” of any asset class. If your portfolio does not include stocks or assets that can grow like stocks, the growth may not be that fast. For you to have enough money to retire, you will need to save more money or defer retirement and work a little bit longer.
Should you be thinking of drastic moves in your investment (like moving most or all of your investment accounts into cash), think again. It may feel like a safe decision now but then again, we never advise you to decide based on feelings because it’s never a good practice. What you should have is a long-term investment plan that you can follow regardless if the market is up or down. If not, you’ll be driven your emotions and it could cause you to move your stocks at the wrong time: buying when the market peaks or selling when it’s about to hit bottom.
Disclosure: Neither Bestow nor North American Company for Life and Health Insurance were involved in the preparation of the information in this article. The opinions and ideas expressed in the article are those of the author(s) and are not promoted or endorsed by Bestow or North American. You should always seek professional advice before making a financial decision.