Where to Start: Investing Basics for Young Adults

Feeling overwhelmed by the world of investing?

You’re not alone. Many young adults are navigating this financial landscape for the first time. It’s easy to feel lost in a sea of financial jargon and complex strategies. But here’s the good news: you don’t need a finance degree to start building a solid financial future.

Investing early is one of the most powerful tools you have. The magic of compound interest means that your money can grow exponentially over time, turning small investments today into substantial wealth tomorrow. Let’s break down the essentials to help you make informed decisions and build a solid financial future.

Defining Investment Basics

So, what exactly is investing? Simply put, investing means using your money to buy something with the hope that it will be worth more in the future. This is different from saving, which is typically setting aside money for short-term goals or emergencies in a low-risk account. While saving is essential, investing is about growing your wealth over the long haul. Think of saving as building a safety net, and investing as building a ladder to your dreams.

Risk Assessment

Before diving into specific investment strategies, it’s crucial to understand your personal risk tolerance. Are you comfortable with the potential for significant gains and losses, or do you prefer a more conservative approach? Understanding this will guide your investment choices.

• Conservative: You prioritize preserving your capital and accept lower potential returns.
• Moderate: You’re willing to take on some risk for moderate growth.
• Aggressive: You seek high returns and are comfortable with potentially significant fluctuations in your investments.

Knowing your risk tolerance helps you avoid emotional decisions that can derail your financial plans.

Liquidity

Liquidity refers to how easily you can convert an asset into cash. Some investments, like stocks and bonds, are highly liquid, meaning you can access your money relatively quickly. Others, like real estate, are less liquid. Liquidity matters because it determines how quickly you can access your funds in case of an emergency. However, higher liquidity often comes with lower potential returns. It’s a balancing act.

Diversification

Diversification is a core principle in investing. It means spreading your investments across different asset classes to reduce risk. Don’t put all your eggs in one basket. By diversifying, you can minimize the impact of any single investment performing poorly. For example, a diversified portfolio might include stocks, bonds, real estate, and even some alternative investments.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. (26-LPL)

Getting Started

How Much to Invest

Determining how much to invest depends on your income, expenses, and financial goals. A good rule of thumb is to follow the “pay yourself first” principle. This means setting aside a portion of your income for investing before paying your bills.

Create a budget to track your income and expenses. This helps you identify areas where you can cut back and save more.   Percentage-Based Investing: Consider investing a fixed percentage of your income, such as 10-20%, consistently.

Retirement Savings

Retirement might seem far away, but starting early is essential. Take advantage of employer-sponsored retirement plans like 401(k)s and consider opening a Roth IRA.

• 401(k): Often includes employer matching, which is essentially free money. Maximize this!
• Roth IRA: Offers tax-free growth and withdrawals in retirement.

To figure out how much to save, consider your current income, estimated retirement expenses, and the power of compound interest. Many experts suggest aiming to save 10-15% of your income for retirement, if you can.

Investing on Your Own (Or with help)

Whether you’re starting with a modest amount or have a more substantial sum ready to invest, you have a couple of primary routes to explore. You can choose the hands-on approach by opening your own brokerage account and making your investment decisions directly, or you might prefer the guidance of a financial advisor and planner.

If you’re considering managing your initial investments yourself, a brokerage account is the fundamental tool you’ll need. Think of it as your personal gateway to buying and selling various investments like stocks, Exchange Traded Funds (ETFs), and mutual funds. Here’s a quick overview of the steps involved in getting started on your own:

Choosing a Brokerage: Take some time to research the different online brokerage firms available. Key factors to consider include their fee structure, any minimum deposit requirements, the variety of investment options they offer, and how user-friendly their platform is. Some well-known options include Fidelity, Schwab, Vanguard, and Robinhood.

Selecting Your Account Type: Decide which type of account aligns with your financial goals. If you’re saving for retirement, exploring a Roth IRA or a traditional IRA could be beneficial. For general investment purposes, a taxable brokerage account is typically the appropriate choice.

Funding Your Account: Once your brokerage account is approved, you’ll need to deposit funds. Most brokers offer the convenience of linking your bank account for easy electronic transfers.

Making Initial Investments: It’s often wise to begin with smaller investment amounts. There’s no need to feel compelled to invest a large sum immediately. Instead, focus on understanding the fundamentals and gradually building your investment portfolio over time.

Regardless of the path you choose initially, as your assets grow, your need for more comprehensive and personalized financial planning and advice may also increase. We recommend considering firms like ours, which can offer that additional support and expertise as your financial situation becomes more complex in the future.

Common Pitfalls and How to Avoid Them:

• Emotional Investing: Avoid letting fear and greed drive decisions. Stick to your long-term plan.
• Ignoring Fees: Pay attention to expense ratios and trading commissions. Opt for low-cost options.
• Lack of Research: Thoroughly research investments before making decisions.
• Not Rebalancing: Rebalance your portfolio annually or semi-annually to maintain your desired risk level.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. (28-LPL)

Conclusion

Investing as a young adult is one of the smartest financial moves you can make. By understanding the basics, developing a solid strategy, and avoiding common pitfalls, you can build a strong foundation for your financial future.

Remember, starting early and staying consistent are key. Investing might seem daunting, but with the right knowledge and strategy, you can build a secure and prosperous future. Don’t wait – start taking control of your financial future today.

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