21.08.2024
FINANCIAL ADVICE FOR YOUTHS - HOW TO INVEST IN YOUR 20S?
For most people, the twenties are an exciting decade with many important decisions to be made, both personally and financially. Follow up, study or work, travel, wedding, first car and maybe even own home.
With so many exciting adventures and changes happening, not many young people think big about the future. Or about the accumulation of wealth when the dreams are big and the salary is still modest.
After reaching adulthood, it's never too early to start sorting out your own finances and making your first investments. It is important for young people to know what to pay attention to when they are "walking through" investing.
The right balance between chance and risk
Myths and (supposedly) safe advice about stocks or the perfect portfolio hover around building wealth at an early age. A portfolio consists of different asset classes. Stocks can generate high returns, but they are also subject to fluctuations. Bonds are considered a relatively stable investment, but in the current market environment they achieve low and sometimes even negative returns. Each asset class has different advantages and disadvantages. That's why it's important to balance between different values to find the asset allocation that fits your financial style and lifestyle.
Many financial advisors recommend portfolios based on the 100 minus age rule. This means that a 20-year-old should invest 80% of his savings in stocks and 20% in bonds. For an 80-year-old, the allocation is reversed: 80% invested in conservative bonds and only 20% in stocks. There is a grain of truth in this rule. Long-term investments are considered less risky because short-term price fluctuations can simply be paid out. And with the compound interest effect, even small sums can turn into a significant fortune over time.
So let time work for you. But even when you're young, you need to differentiate between different investment goals and create different portfolios for them—even in your 20s. Do you have a lot of plans? Then don't put everything on one card when investing.
Young people who are just entering the world of adults at full throttle often do not yet have very concrete plans for life. So how and what precautions should you take? Although each case is unique, there are a few rules of investing and financial advice that always work:
Anyone who falls ill or becomes unemployed gains nothing – but the cost of living continues. Therefore, the most important rule of financial education is to create an emergency fund to protect yourself from the unexpected. The money in it should cover your average expenses for 3 to 6 months.
Invest this amount conservatively and in such a way that you can access it anytime. If you still don't have enough for your 'safety net', you can, for example, save through an exchange-traded fund (ETF) savings plan. It provides an opportunity to save and invest simultaneously with small amounts every month that are invested in mutual funds.
Successful investments often start inefficiently. This is because compound interest takes time for your money to grow. The long investment period is ideal, because even with small initial amounts, a small (and why not a large) fortune develops in the long term.
Those of you who invest time and stay calm will be rewarded with decent stock market gains. Young people are often impatient, but remember that patience pays off. Since your retirement date is more than 40 years in the future, your money has plenty of time to multiply. Take advantage of this and start long-term retirement insurance as early as possible, for example through a passive savings plan on an ETF.
A safety net protects you in the short term, a mutual fund savings plan allows your retirement benefits to grow - but there's more to the grain. Consider your medium-term plans and goals and make provisions with different portfolios.
Set savings goals such as travel, starting a home and family, and determine which strategy will most successfully get you to your goal. It is best to divide your investments into several portfolios - this is the most sensible way to take advantage of the opportunities of the world markets.
You will come across diversification as you learn the basics of investing. There are countless articles that offer advice on how and why to diversify. However, you should also familiarize yourself with the effects of "diworsification," a term coined by Wall Street trader Peter Lynch for the negative consequences of excessive diversification.
It is important to know that diversification does not guarantee profit without loss, it is simply a strategy to balance the risk associated with investing. According to experts, a successful portfolio ideally has between 25 and 30 stocks.
Effective diversification of your portfolio will be achieved by balancing your investments, spreading them among multiple assets. Some asset classes are high risk with high profit potential, while others are low risk with little profit potential. Using a mix of assets gives you relatively good security.
Greater diversification does not always equal minimized risk. In fact, over-diversification limits the potential of your investments so much that it can negatively impact your investments. This is called over-diversification. Success, as usual, lies in the "golden mean".
