While many people think millennials are a bunch of financial nincompoops trading their retirement money for a cup of overhyped coffee, the picture is not all that bleak. Neither is it a rosy one. While many are willing to put away some money for savings, only a few go as far as to brave the world of investments. When you are in your 20s, fresh out of college and only just starting to navigate the “real world,” adding investing into the mix can get overwhelming. Allow the following definitive guide for investing to give you a blueprint you can easily follow.
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You’re in luck, because the first rule of investing works in your favor. That is, time is one of your bestfriends when it comes to generating investment returns. This is owing to a concept called Compounding Returns, which gives your money the power to grow exponentially over time. Take for example two people who both invested $10,000 and earned an interest rate of 10% each year. The only difference between the two investors is that the first one began investing when he was only 20, while the other got started at the age of 30. By the time they reached the age of 65, the investor who started young has grown his money to more than double that of the second investor who started late. The extra 10 years worked wonders for the first investor. Make sure you don’t miss out on the power of compound interest as well. The best time to invest is now, even if it means starting small. Another major advantage of starting young is that you get to learn from mistakes that will not sabotage your finances for the rest of your life, as you have the benefit of a longer time frame and more leeway for recovery.
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Take advantage of tax benefits
Make sure you take full advantage of tax advantaged investment vehicles like the SEP-IRA, 401k, and Roth IRA. This means you get tax benefits whenever you withdraw or deposit money. Taxes can cut a huge chunk out of your future investment returns. Hence, you would want to minimize this as much as you can. For your long-term investments, it is best that you max out your ROTH IRA, 401k, and SEP-IRA. One cool feature of IRA accounts you may not be aware of is that you can buy and sell stocks within them. As a matter of fact, you can buy AMZN in your SEP-IRA. Do note that all tax-advantaged retirement accounts have contribution limits, so there is only so much you can do with this option.
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Invest long-term in index funds
Allot a huge chunk of your long term investments in index funds. 70% of your portfolio could go to this relatively safe investment vehicle. You can invest in both domestic and international index funds. You may allot 80% on the former and 20% on the latter. You can get heavily invested in this financial instrument in the long haul without losing sleep. As more than 90% of investors fail to beat the market, it is best to track the market instead. While equities can be erratic in the short term, they always end up beating inflation in the long run. Plus, they can also be considered low-tax as you would be doing few trading with them.
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Invest long-term in individual equities
You can allot 20% of your long term investments to individual equities. Choose companies that you believe in and stick with them. You may invest in companies that you personally use, such as Facebook, Apple and Amazon. Try not to sell stocks too often, as this can cost you additional expenses in terms of taxes. Holding on to your investment for at least a year will have you paying only for capital gains tax. Also, you may want to steer clear of day trading if you haven’t got the necessary experience, as even seasoned investors tend to lose more than they gain from it.
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Invest in REITs and physical real estate
Buying you own house or condominium unit can have you making more savings compared to when you are renting. Even if you already have your own home, it is still advisable to allot 5% of your long-term investment portfolio to real estate, as this is one of the more secure investment instruments. Explore your options with multi-unit buildings and prime condominiums. They are often affordable and well-placed, making them attractive to the market and highly valuable.
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Invest in non-traditional investments
You can invest the remaining 5% of your long-term portfolio in domains and art. Note that while both these options can be great long-term investments, they are essentially speculative and come with risks. Make sure you know enough about them to be able to make educated purchases.
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Invest in the right investment vehicles for your short-term needs
If you intend to save for a car, home, vacation or simply make an investment in the next five years or less, then putting your money into equities may not work for these particular purposes. This can come with great risks, as stocks can get very volatile in the short run. Your fund for, say, a car can easily lose 20% of its value by the time you are ready to make your purchase.
For short-term investing, your best option is a bond fund, which invests 70% in US government bonds and 30% in corporate bonds. You may aso opt for a certificate of deposit (CD) at your local bank. Never settle for just a regular savings account, as the interest rate can go as low as 0.1% interest. You would practically be losing money due to inflation if you go for this option.
If you are willing to risk as little, a balanced index fund can be a good option for short-term investing. It invests approximately 40% in stocks and 60% in bonds. While the risks are higher, there is also a greater chance of generating a higher return.
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Don’t just rely on financial advisors
If the first rule of investing is to start early, the second is to buy only what you understand. This means you need to know what an investment is truly worth. More than just asking whether the stocks of Facebook will go up in a month, learn about how Facebook makes money and find out if the source of income is sustainable and whether a competitor could easily grab the market share. Such things will help you figure out the worth of Facebook and other such stocks in the long run. Learn about the bonds, ETFs, stocks and property investment you intend to purchase, and make calculated decisions based on facts and logic.
The world of investing can be a steep learning curve, but it is one worth striving for. Get started now!
- 1 Start early
- 2 Take advantage of tax benefits
- 3 Invest long-term in index funds
- 4 Invest long-term in individual equities
- 5 Invest in REITs and physical real estate
- 6 Invest in non-traditional investments
- 7 Invest in the right investment vehicles for your short-term needs
- 8 Don’t just rely on financial advisors