8 Rules for Investing In Your 20s You Can't Ignore
Young investors must follow these rules.
When it comes to getting started with investing, there's no time like the present. If you're a 20-something, time is your biggest asset. "The consequence of waiting to invest is significant," says Anthony Pellegrino, founder of Goldstone Financial Group in Oakbrook Terrace, Illinois. "If you start investing when you're 22 and average an 8% rate of return, you can save as little as 12% of your salary, including an employer match, and be ready to retire by the time you're 62." If an early retirement sounds goods, then it pays to know how to start investing in your 20s. While there's no official playbook to follow, keeping these rules in mind can help with preparing your portfolio for long-term success.
Just start.
This may be the simplest tip for how to invest money in your 20s, but it's one of the most important. "Typical thinking at this age is to wait, simply because they have time," says Daniel R. Hill, president of Hill Wealth Strategies in Richmond, Virginia. "While having time is true, I discourage my 20-something clients from waiting because the sooner they begin saving, the sooner they can obtain their financial goals." Your employer's retirement plan may offer the easiest entry point to investing. If you're not automatically enrolled, get in touch with human resources to find out how to sign up. And if you don't have a workplace plan, you can still get started with an individual retirement account.
Don't miss out on free money.
If you're enrolled in a 401(k) or similar plan at work, the next rule for how to invest in your 20s is using your account to its full advantage. "Maximize your tax-deferred, employer-matched investment options first before investing in other options," says Graham Williams, co-founder of Optimist Retirement Group in Scottsdale, Arizona. "The combination of dollar-cost averaging, tax savings and a potential employer match creates the ultimate compound interest machine." At a minimum, you should consider investing at least enough to get the full match if one is offered. As your income increases year over year, you can increase your contribution rate correspondingly. This, says Williams, is the easiest way to invest on autopilot in your 20s.
Avoid overthinking.
Learning how to invest in your 20s can feel overwhelming, but never let that stop you from acting. "Don't waste time trying to pick the next Apple; just get money invested," says Andy Garrison, senior wealth advisor with Mariner Wealth Advisors. He says for 20-somethings that may mean investing in broad-based index funds or companies that promote social responsibility and support their beliefs. But whichever route you choose, it's important to avoid getting bogged down in the details and losing perspective. "The big picture is if you start investing now, you may be able to work a lot less over your life because you're letting your money do the heavy lifting over time," Garrison says.
Invest with a plan.
Proper planning is one of the key ingredients for how to successfully invest money in your 20s, says John Cunnison, chief investment officer at Baker Boyer. That includes outlining your investment strategy, your contribution rate and frequency, and what you hope to achieve with your portfolio. "This plan will serve as your map for the long road ahead," Cunnison says. And remember that making your plan work is largely about being patient and adjusting as your risk tolerance and goals change. "Treat your investment account like an angsty teenager that needs some time and space to grow," he adds. "It might act up from time to time, but in the end, it'll all work out."
Don't fear volatility.
If you're just learning how to invest in your 20s, market volatility -- such as the kind associated with the pandemic -- might scare you off. Don't let it. Instead, look at it as an opportunity, says Kelly Welch, wealth advisor at Girard. "Timewise, you may wait for the market to settle down, but no one knows when or if this will happen with any certainty," Welch says. In the meantime, you could miss out on a chance to buy investments on sale, which could pay off once the market begins to stabilize. "There is no perfect year, month or day to begin investing, because the future market is unknown," she adds. "But if you sit on the sidelines, you're not in the game."
Diversify, but don't chase trends.
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 toward your long-term goals. "One big mistake to avoid as a 20-something investor is holding concentrated positions in trendy investments," says Rob Cavallaro, chief product officer at RobustWealth. "During the dot-com bubble, investors chased expensive internet stocks, and a lot of people got hurt," Cavallaro says. "Stick with a diversified portfolio of low-cost funds invested in conventional asset classes, at least initially." That may sound boring, but steering clear of flashier investments while you get to know how the market works can be to your advantage.
Stay aligned with your goals.
When shaping your investment portfolio in your 20s, think about what you hope to achieve. Then tailor your asset allocation to help you reach those goals. "Saving for retirement should generally involve a small percentage of cash and bonds, mixed with a large percentage of stocks," says Michaela McDonald, financial advice expert at Albert. "Shorter-term goals, like building a safety net or setting aside a down payment for your first home, should be invested more conservatively." When considering asset allocation, keep your personal timeline in focus. One of the biggest predictors of market success is time in the market, McDonald says, so don't shy away from taking more risk in your 20s if it would further your goals.
Don't feel pressured to go all-in.
Investing in your 20s means you do have time on your side, so don't rush it. "If you've never invested in the market before, you should ease into it," says Lindsey Bell, chief investment strategist at Ally Invest. "You'll need to get used to it before you feel comfortable with the up and down swings the market can make." Instead of tying up all of your investable assets into a single stock or fund, for example, you might choose the micro-investing app route instead or invest a little at a time each month to build up your portfolio. And take time to get to know what you own. "Invest in something you understand," Bell says, and worry about graduating to more complex investments later.
Eight rules for investing in your 20s:
-- Just start.
-- Don't miss out on free money.
-- Avoid overthinking.
-- Invest with a plan.
-- Don't fear volatility.
-- Diversify, but don't chase trends.
-- Stay aligned with your goals.
-- Don't feel pressured to go all-in.
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