It is never too late to start investing. You can always invest for your retirement at any age. It is always a good idea to start investing as soon as possible. Starting in your 20’s gives you the greatest chance of actually achieving your financial goals and become a millionaire. Let’s take a look at how a twenty something year old should invest and what to invest in.
How Much To Invest In Your 20’s
Individuals in their 20’s often do not have as much to invest as older individuals. That is because the average salary is lower than the average middle aged investor. Individuals in their 20’s can however invest a larger percentage of their earnings than older individuals. Twenty something’s should start with at least 20% of their income going towards investing.
This is a great percentage because it is affordable and will get you in the habit of putting your money to work right away. It only gets harder to save and invest the older you get. Building smart financial habits in your early years will make it easier for you to keep investing in your 30’s 40’s, 50’s, and 60’s. Every dollar that you put away today is one less dollar that will have to save tomorrow.
Where To Put Your Money In Your 20’s
I have always discovered that it is a good idea for a young investor to have both a retirement plan and a brokerage account. Retirement plans are 401k’s, IRA’s. 403B’s, and other federally recognized plans that have tax advantages. They are great for socking money away for your golden years. Brokerage accounts are better for investing money that you would like to withdraw before the age of 59 ½. Young investors should take a twofold approach. The first approach is to invest to make sure that the retirement years are taken care and the second approach is to invest to make money now.
For my own portfolio, I have money that I invest in a retirement plan for when I reach retirement age. I also have brokerage accounts, dividend reinvestment plans, and direct stock purchase plans. Those accounts are for money that I would like to have access to before I reach retirement age.
What To Buy In Your 20’s
Your investment portfolio in your 20’s should generally be geared to seeking high risk and high returns. Your early working years are the years when you can take the most risk. This is because most 20 year olds do not typically have a ton of financial obligations and a family to support. Your money can go towards trying to position your portfolio for maximum growth so that you are set by the time you are in your 40’s.
A young investor’s portfolio should be heavily tilted towards stocks. Young investors can afford to place at least 90% of their portfolios in equities. This can be buy purchasing individual stocks, exchange traded funds or by buying mutual funds. Since common stocks offer the greatest price appreciation, young investors should have exposure to individual stocks.
Invest in Small and Mid Cap Stocks
While large cap stocks like Proctor & Gamble (PG) and Hershey’s (HSY) are appropriate for any portfolio, smaller companies should be in a young investor’s portfolio. This does not mean investing in stocks that will lose your money but buying companies with a great business model and growth potential. A small cap stock could turn into a multibagger for your portfolio.
A company like GameStop (GME) is a great example of this type of company. GameStop was a small company that was entering the video game retail industry. Smart investors bought into the company in its early growth days 10 years ago. The stock has returned a solid 137% return over the past years resulting in a nice profit for investors.
Netflix (NFLX) is another great example as the stock has generated a 3,287.6% over the past 10 year. That is the type of return that an investor can retire on. Young investors need to take a shot on a few small companies or small cap funds because of the long term growth potential.
Keep in mind that the amount you can invest can vary drastically. A single 25 year old with no children or bills can afford to be a whole lot more aggressive when investing than a married 25 year old with kids, a home, and lots of debt. If you are young and in position to invest heavy then you should take a chance. You are only young once and the rewards far outweigh the risks!