Investing in Your 20s & 30s For Dummies
Investing as a young adult holds the promise of paying off big for decades to come if you know what you’re doing. This Cheat Sheet highlights important beliefs that can help guide you in your investment journey. When you understand your investing goals and beliefs, you can build your knowledge, do research, and make good choices that make the most of your money and investments.
Copyright © 2013 Eric Tyson All rights reserved.
Developing and Testing Your Investing Beliefs
What are your investing beliefs? Most investors haven’t taken the time to consider that question, let alone to answer it. During the sharp stock market slide in 2008, some investors started following particular gurus who claimed to have predicted the financial crisis. These investors wanted to believe that someone out there could predict important financial events and tell folks how to time their investments to benefit from what was about to unfold.
Such market timing is a fool’s errand. It sounds possible, and we’d like to believe that it is possible, but it’s not possible on the scale various charlatans would have you believe. Furthermore, many of those who boast the loudest about their market-timing ability are worse than average at it.
It’s challenging to work with someone on his investments when he has little in the way of background and beliefs. As someone seeking to educate themselves about investing, you may have a better idea of your investment beliefs than other investors do. To help you along in this process, here are some beliefs for you to consider:
Your own personal comfort matters. A wide range of investments are available to you, including stocks, exchange-traded funds (ETFs), mutual funds, real estate, and small business. Some folks are simply more comfortable with particular investments, so you shouldn’t force yourself into a portfolio that’s recommended as being best for you. Consider the value of your time and your investing skills and desires. Investing in stocks and other securities via the best mutual funds and ETFs is both time-efficient and profitable. Real estate investing and running a small business are the most time-intensive investments.
Costs matter. The more you pay in commissions and management fees on your investments, the greater the drag on your returns. And don’t fall prey to thinking that you get what you pay for. Take advantage of tax-deductible retirement accounts, and understand the effect of your tax bracket when investing outside tax-sheltered retirement accounts. Minimize your trading. The more you trade, the more likely you are to make mistakes. Also, you suffer increased transaction costs and higher taxes for non-retirement-account investments.
Market timing is much harder to predict than folks realize. Don’t bail when things look bleak. The hardest time, psychologically, to hold on to your investments is when they’re down. Even the best investments go through depressed periods, which is the worst possible time to sell. Don’t sell when there’s a sale going on; if anything, consider buying more. Ignore soothsayers and prognosticators. Predicting the future is nearly impossible.
There are better times than others to sell. When you’re really feeling good about an asset class like stocks, and those assets have had a multiple-year run and are getting widespread accolades, that’s a good time to lighten up if you have other good reasons for doing so. By contrast, you can bump up your stock allocation if you’re comfortable doing so after a major market decline.
Think long-term. Because ownership investments like stocks, real estate, and small business are more volatile, you must keep your long-term perspective when investing in them. Don’t invest money in such investments unless you plan to hold them for a minimum of five years and preferably for a decade or longer.
Diversify. Diversification is a powerful investment concept that helps you reduce the risk of holding more-aggressive investments. Diversifying simply means that you hold a variety of investments that don’t move in tandem in different market environments. When investing in stocks, for example, invest worldwide. You can diversify further by investing in real estate.
Emphasize value. Over the long term, value-oriented investments tend to produce higher returns with less volatility than do pure growth-oriented investments.
Ignore the minutiae. Don’t feel mystified by or feel the need to follow the short-term gyrations of the financial markets. Ultimately, the prices of stocks, bonds, and other financial instruments are determined by supply and demand, which are influenced by thousands of external issues, including millions of investors’ expectations and fears.
You are what you read and listen to. Don’t pollute your mind with bad investing strategies and philosophies. The quality of what you read and listen to is far more important than the quantity.