Here are the best tips for young investors to become profitable long term investors that turn into millionaires, young.
Time is a young investor's best friend. With sufficient resources and practical skills, investing early in life can pay huge dividends in the future. That is why it is never too early to prepare financially for your future. The investments you make while getting started as a young investor can significantly impact your future finances, so investing your money in the right places is extremely important. We put together this guide to help young investors do just that!
A young investor has numerous investing alternatives, including stocks, bonds, mutual funds, and real estate, to name just a few. Each option has advantages and disadvantages, depending on the investor's goals.
Regardless of what you decide to invest in, there are some universal tips that can allow you to make smarter decisions. Let's go over the core tenets that every young investor should learn.
The earlier you begin investing in life, the more your investments will compound over time. This effect is much more significant than you may think. For example, consider two people, Alice and Bob, who start saving $100/month in a retirement account. Alice begins at age 20, but Bob begins at 30.
By the time they reach 60 years old, Alice will have contributed $48000 to her retirement account, and Bob will have contributed $36000. However, Alice will have about $1.31 million, while Bob will have only $650,000. In other words, despite a relatively small difference in their total contribution, Alice will have nearly DOUBLE the amount that Bob does by age 60.
Are you interested in checking if you're on track for your retirement goals? Then check out this retirement calculator from Nerd Wallet to see where you'll be at retirement age.
Alice and Bob have such a big difference in how comfortable they can be in retirement because Alice had a 10-year head start. Investing earlier allowed her to take advantage of interest compounding. By the time Bob started investing, Alice was not only ahead of him in her contributions, but she was also earning interest on the interest she had already earned.
There are many investment strategies out there, and different ones are right for different people. Finding an investment strategy that works for you is crucial to your success; the earlier you start, the better.
The best strategy for you will depend on what your goals are, what position you are starting from, your income, and how involved you want to be in the process. A simple solution such as a retirement account or a managed investment strategy will be the best option for many people. Accounts like this require very little work from the investor. Setting up recurring deposits each time you receive a paycheck is also possible, so you never even have to think about your investment.
For other people who want more control, investing in stocks, cryptocurrencies, and even real estate (if you can afford it) can potentially offer significantly higher returns.
It's pretty simple: to be an investor, you need money. To have money, you need to build savings. To build savings, you need to earn more than you spend. So, to be an investor from a young age, you need to get used to saving more and spending less.
Most financial specialists agree that this is probably one of the most critical pieces of advice regarding investing.
Think about it. Let's say you got lucky with an investment that grew with an interest rate of 20% per year for five years. That's great!
But if you spent most of your income at restaurants or on a nice car, you may not have much left to invest. If you invested $1,000 in this lucky opportunity, you would have $2488 in 5 years. But if you purchased a car that was $5000 cheaper and invested $6,000, you would have $14,929!
So, picking the right investment is great, but having money to invest is just as important.
Diversifying your portfolio means investing in a variety of asset classes instead of concentrating too much on one area. From a high level, this could mean investing in stocks, bonds, crypto, real estate, commodities, or some combination thereof. This can also refer to diversifying your investments within each category, such as diversifying your stock portfolio by investing in tech stocks, healthcare, energy, etc. By diversifying your assets, you help mitigate risk and stabilize your returns over the long run.
An easy way to diversify your investments is to invest in index funds, mutual funds, and retirement funds that cover the stock market broadly. You can also invest in real estate, crypto, and even art-related funds. Investing in funds allows you to have a diverse portfolio even when you're just beginning and don't have a high net worth. It also gives you diversity without needing to actively manage your investments every day, week, or even month.
Another way to think of diversifying your portfolio is to diversify your exposure to different levels of risk. While it might make sense to have some exposure to high-risk/high-reward assets such as crypto and tech stocks, most people should also invest in assets that produce consistent, steady returns without as much risk.
With a diversified portfolio, you'll be able to reap the rewards of bull markets when riskier assets outperform, but you'll still have steady growth during bear markets as well.
One thing that should be a priority before investing your money is avoiding unnecessary debt. Avoiding bad debt is closely related to spending less and saving more. If you have a large car payment, student loan debt, or credit card bill dragging you down, it will prevent you from being able to invest a meaningful amount when you're young. Unlike a mortgage or a business loan, this type of debt is almost always only negative, acting like a ball and chain as you try to climb your way up the wealth ladder. Getting rid of bad debt should always be a priority, especially because they often have high interest rates that drag you down further.
However, not all debt is bad. For example, let's say you take a loan to buy real estate to rent or sell in the future. This type of debt is an investment. Of course, there are risks in it, and if the investment does not work out, you will be left with a debt to pay, but generally, 'good' debt can be a means to a better financial future.
Most investors overlook the impact of inflation and taxes on their returns. Your actual returns will be affected by inflation. An investment can seem to offer great earnings, but if the taxes on this specific investment are high, the actual returns can drastically drop. The same goes for inflation. Thus, it is vital to understand how taxes and inflation work in the investment you are choosing to make. There are asset alternatives that have a tax liability or that are tax-deferred accounts. If you want to ensure you organize your investments the best way in terms of taxes, consider hiring an accountant or tax professional to help you.
More experienced investors may suggest you build your portfolio with stocks for high risk, real estate for medium risk, and CDs and traditional savings accounts for low risk.
However, some argue that younger investors can and should give more weight to higher-risk/higher-reward investments. This is because when you're young, you have more time to recover if your investments fail. Young investors also typically have less to lose and would therefore have more to gain from a high-risk investment paying off.
As mentioned, diversifying your portfolio is still important, and even at a young age, you should not overly invest in high-risk assets. But you do have more room to experiment and find an investment strategy that you feel comfortable with.
When you start investing young, you give yourself a much better chance to have a nice cushion saved up for retirement or be able to afford a down payment sooner. The younger you start, the better positioned you will be to meet your goals. This way, you are most in control of your future.