How to Invest for the First Time in Your 20s
KEY POINTS
- Many people can only invest modestly in their 20s because they're not earning a whole lot and grappling with other expenses.
- Even if you only invest a small amount, going heavy on stocks could set you up with a lot of wealth over time.
- You can stick to broad market ETFs until you grow your investing knowledge.
Many people don't start investing -- for retirement or otherwise -- until their 30s or beyond. And that's understandable.
When you're in your 20s, you may be living on an entry-level salary that isn't much to write home about. You might also be grappling with a world of expenses, like lingering credit card debt from college.
As such, you may not have a ton of money to invest with. And you should know that's totally OK. Even if you only manage to invest a small amount of money in your 20s, it could go a long way. So the key is to simply get started. Here's how.
Go big on stocks
Some people are hesitant to invest in stocks because doing so can be risky. But if you're in your 20s, your age alone minimizes that risk in the context of saving for a far-off milestone like retirement.
Over the past 50 years, the stock market has averaged an annual return of 10%, as measured by the performance of the S&P 500. During that period, there were times when the market lost money. That 10%, however, represents its average return overall.
What this tells us is that if you're able to start investing in your 20s, you might have close to a 50-year window before retirement starts. And that means you're likely to make money by investing in stocks, even if you happen to take some losses temporarily.
Go broad at first
It can take some time to get comfortable with the idea of buying individual stocks. And it can also take time to build up the skills needed to research stocks thoroughly. So if you're first starting to invest in your 20s, a good bet may be to load your portfolio with S&P 500 ETFs, or exchange-traded funds.
The S&P 500 is an index that consists of the 500 largest publicly traded stocks. When you buy into the S&P 500, you're basically putting your money into the broad stock market. That means you get the benefit of instant diversification, and you don't have to take on the stress of vetting companies individually.
Investing in your 20s can go a long way
You may only be in a position to invest $100 a month here and there in your 20s. You might think, "Why bother?" But here's why you absolutely should bother.
Let's say that by age 25, you have $500 in a brokerage account that's loaded with S&P 500 ETFs generating a 10% yearly return. Even if you don't contribute another dime, by age 70, that $500 investment will be worth almost $36,500.
Meanwhile, let's say you get into the habit of investing $100 a month at age 25 and do so until age 70. Assuming that same 10% return, you're looking at a total balance of $863,000. That could make for a very nice retirement nest egg.
One of the most important things you can do in the course of your investing career is just get started. And if you're able to make that happen in your 20s, you can set yourself up for a very comfortable retirement down the line.
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