- October 23, 2020
How to Invest in Your 20s
You’re always being told to invest your money, even when the stock market is volatile. But what exactly should you be investing in as a young investor? Below are some investment ideas that you should consider while you’re young. You don’t have to invest in them all, but by picking two or three and steadily funding each, your wealth will begin to grow rapidly.
Invest in the S&P 500 Index Funds
As a young investor, you should be concentrating your investments in growth-oriented assets. This is because in the years ahead of you, you can take advantage of compounding of much higher investments than you can get on safe, interest-bearing ones.
The S&P 500 index has given an average annual rate of return of 10%, right the way back to 1926. That’s a very powerful source of compound earnings. Work out the rate of return with a rate of return calculator.
While the stock market is volatile at the moment, stocks are still a good choice if you’re young. You can take advantage of low prices for top stocks. You have plenty of time to weather the current lows on the stock market. Make sure you only invest money that you don’t currently need.
Invest in Real Estate Investment Trusts
Real estate is another growth-type investment strategy, and you can’t get enough of those when you’re young.
Investing in a real estate investment trust (REIT) is an opportunity to hold a portfolio of commercial real estate. This can be more valuable than owning a single investment property, as the portfolio is invested in different kinds of property in various areas. That gives you greater diversification than you can get with a single property.
Another advantage is that you can invest in a REIT with just a couple of thousand dollars. Buying an investment property outright would require a much large amount of capital just for the down payment. You also don’t need to actively manage a REIT the way that you would an investment property.
REITs can also have the advantage of investing in commercial real estate, which often outperforms residential properties.
There’s an argument that REITs can outperform stocks. Even if the returns aren’t better than equal to those of the S&P 500 index, a REIT is still a valuable hold for young investors.
Real estate has been a strong performer over at least the last fifty years. Perhaps more importantly, real estate, in particular commercial real estate, often moves independently of the stock market.
A real estate investment trust may continue to provide positive returns even if the stock market is falling. This is because REITs pay regular dividends and because commercial real estate may keep rising in value even if the stock market is dropping.
REITs are also a way of diversifying your growth assets beyond stocks.
Invest Using Robo Advisors
It’s advised to invest in stocks through S&P 500 index funds or commercial real estate through REITs. If you’re not familiar or comfortable with investing on your own, you can make investments through a robo advisor.
A robo advisor is an online, automated investment platform that does all the investing for you. It will create your portfolio and manage it going forward. They can even reinvest your dividends, rebalance your portfolio, and offer various tax strategies to minimize your taxable investment gains.
You can also use a robo advisor for either a taxable investment account or a retirement account, particularly IRAs. Using a robo advisor is hands-off investing at its best. All you need to do is fund your account, and the robo advisor will handle all the other details for you. They will usually invest in a mix of stocks and bonds, and potentially in REITs.
Buy Fractional Shares of a Stock or ETF
You don’t have to buy full shares of a stock or an ETF these days. If you want to be more hands-on with your investing but you can’t afford a lot of stock, you could consider investing in fractional shares. This is when you buy a portion of a stick for a fraction of the price. For example, if you wanted to buy a share in Netlfix, but can’t afford the $500 for one share, you could invest $20 instead and buy a part of that one share. You still own part of the company, even with fractional shares.
Not every investing broker or app will let you buy fractional shares, so look around for one that will.
Buy a Home
Buying a home can be kind of a mixed bag. On the positive, owning a home lets you build substantial equity over many years. This is done through a combination of gradually paying down your mortgage and the value of the property increasing.
Owning a home also has the advantage of leverage. You might be able to buy a home with as little as 3% down, or no down payment at all with a VA loan, and then you can get the benefit of appreciation on valuable property, without a huge out-of-pocket investment.
Even if you don’t do anything more than simply pay off the mortgage in thirty years, your investment will grow. This then increases your initial investment by a huge amount. Price appreciation of the property can make that number even higher.
The downside to buying a home when you’re young is that you may not be at the point in your life when the permanence of homeownership will be to your advantage. If you’re early in your career, you may need to relocate in the future. If you do, owning a home could make that move more challenging.
If you’re single, owning a home can force you to pay for housing than you really need. Marriage in the future could also mean a potential relocation or needing to buy a different home.
Owning your one home is definitely an excellent investment when you’re young, but will you have to do some serious analysis to determine if it’s the right choice at this point in your life.