The MainStreet Guide to Investing in Your 20s

  • Mind on Your Money

    If you’re just a few years out of college, your main financial concerns right now are likely limited to managing your student loan bills and making sure you’re able to pay the rent. But if you want your savings to keep pace with inflation, it’s never too early to start thinking about investing. Still, that doesn’t mean you should jump on E-Trade and start flipping stocks and chasing profits. There’s a right way and a wrong way to start investing as a young person, and we talked to some experts to get their take. Photo Credit: Getty Images
    Take Care of Your Credit Card Debt First
  • Take Care of Your Credit Card Debt First

    Before you even think about getting into the market, make sure you’ve paid down your credit card debt. This sounds more like general personal finance advice than investing advice, but think about how much you’re paying in interest every month if you’re carrying a substantial amount of credit card debt. There’s simply no way the rate of return you’ll get from the stock market will be able to exceed your credit card’s interest rate, so your savings are better put toward paying down that debt. “All of this [investing] should come after paying off your credit card debt,” says Alex R. Foster of AF Capital Management, who adds that paying off student loan debt, while important, is less of a priority due to its comparatively low interest rate. Photo Credit: alancleaver_2000
    Just Save
  • Just Save

    Lance Roberts, CEO of Houston-based investment management firm StreetTalk Advisors, says that before you even start thinking about which stocks or funds to invest in, you need to make sure you’ve positioned yourself to be saving enough money. “Ninety percent of all Americans do not save enough money,” he says. “Learn how to live on a budget and save money.” Roberts says you should have savings equivalent to three to six months of salary – an emergency fund, in case you get fired or laid off. Once you have that in a savings account or certificate of deposit, form a household budget that ensures you’re able to save 30% of your income every month. Once you’ve got that, you’re ready to start putting those savings to work. Photo Credit: Getty Images
    Take Advantage of Matching
  • Take Advantage of Matching

    If your employer allows a 401(k) plan with matching, get your greedy little hands on it as quickly as possible. You’re not going to find a better deal than that, so you should make that the first destination for your dollars. “If you can set aside money and have it matched, max out what’s available to you,” says Ted Beck, CEO of the non-profit National Endowment for Financial Education. Photo Credit: _e.t
    Manage Your Risk
  • Manage Your Risk

    Arguably the most important consideration when investing in the market is how much risk you’re willing to stomach. While younger people can have more risk in their portfolio than someone on the verge of retirement – as you have more time to recover from serious losses – you should still err on the side of conservative investments. “The most important thing is preserving the principal investment,” says Roberts. “[Preventing] the destruction of principal is much more important than trying to chase market returns.” There’s also a good psychological reason why first-timers in particular should ease into the appropriate level of risk. “Try to start with very low risk, because it’s tough for first-timers to see things go down,” says Beck. “If you get wiped out, your confidence level is going to go down to zero.” Photo Credit: Mark Rain
    Don’t Watch
  • Don’t Watch

    That brings up another point: You should avoid putting yourself in a position where day-to-day fluctuations might scare you out of the market or into making rash buying decisions. In Michael Lewis’s Moneyball, Oakland A’s General Manager Billy Beane famously revealed that he did not watch the team’s games, fearing that the emotional rollercoaster of a 162-game season might lead him to make rash decisions. If you’re investing for the long-term – and you really should be – then consider taking a similar approach. “Have a truly long-term outlook,” advised Roberts, pointing out that liquidating stocks in a meltdown just means that you’ll take longer to recover when conditions improve. “Don’t let emotions drive your investment.” Foster agrees: “Don’t sell in a panic, and don’t invest emotionally,” he says. Photo Credit: Getty Images
    Take Baby Steps
  • Take Baby Steps

    “If you get into it looking for a home run, that’s when you’ll get burned,” says Beck. “Stock trading requires a lot of skill.” Whether or not such a skill can even be said to exist is debatable. But one thing isn’t up for debate: As a first-time investor, you’ll be in way over your head if you start trying to trade individual stocks yourself. That’s why Beck says that he recommends first timers start with a mutual fund. While other advisors recommend products like exchange-traded funds (ETFs), Roberts says that novices should avoid trying to build a portfolio from scratch in this manner. “You have to learn how to drive a car before you can try to build one from spare parts,” he says. “Learn the ebb and flow of the market first.” Photo Credit: Getty Images
    Beware of Fees
  • Beware of Fees

    Of course, getting a mutual fund means getting someone else to handle the management of your assets, and that service doesn’t come free. Mutual funds charge fees, which can vary from fund to fund. Fortunately, they’re required to disclose that information up front. “One might charge 50 basis points, while another will charge 150 basis points,” says Beck. “Look at the performance of the fund and then compare that to the fee;  if two funds are performing the same, I’ll go with the one that’s got lower fees.” If you aren’t careful, these fees can eat away at your gains. Do your homework. Photo Credit: Getty Images
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