Should You Invest?
When you're in your 20s, you're often still working on solidifying your career path and getting your legs underneath you financially. You should be working on creating and sticking to a budget, paying off student debt, and increasing your income through promotions or raises. With all of this going on in your life, you may figure investing can wait. However, it's actually a very good idea to start investing, particularly in the stock market, when you're in your 20s.
Why is investing in your 20s so wise?
Thanks to the miracle of compound interest, any money you invest in your 20s is more valuable than money you will invest in your 30s, 40s, and beyond. The term "compound interest" means that any interest you earn on the money you invest will be re-invested and will earn interest itself. In other words, you'll earn interest on your interest. So the longer your money is invested in the market, the more money it will make for you.
Imagine you invest $100 at a 10% rate of return. One year later, that $100 will be $110. Two years later, you'll have $121. By seven years later, your money will have doubled; you'll have $200, and that whole $200 will be earning you more money.
The sooner you invest, the more money your investments will be worth when you reach retirement age. Even at just a 4% rate of return, a dollar invested at age 20 will be worth $5.48 when you're 65. A dollar saved at age 30 will only be worth $4.80 at age 65.
Why are stocks a good investment in your 20s?
So now you know that investing in your 20s is a smart idea. But where do you invest the money? Stocks are sometimes seen as a risky investment, and they can be. However, when you are in your 20s, you can afford to take that risk. If you invest in the stock market now and the value of your stocks goes down, you have several decades to just wait and let the market recover.
Historically, the market will take a few nosedives between now and the time you retire, and that's okay. What you're worried about is your long-term earnings. If you just leave your money in and ride the waves, you'll come out ahead in the end. You need to take some risk to earn a worthy reward.
How do you choose the best stocks to invest in?
If you enjoy learning about the stock market, you can certainly buy some single stocks and get into trading. However, the best path to investing in your 20s is usually to allow an investment representative to manage your stock portfolio. They will buy and trade stocks for you. They have more knowledge of the market and when you buy versus when to sell, so they will usually earn you a greater return on your investments than you could earn by trading single stocks on your own.
Of course, if you have interest in a certain sector, such as the energy industry or healthcare industry, you could always tell your stockbroker you wish to focus your investments in those industries. They will select stocks for you that meet your requirements and are likely to perform well.
It's never too early to start investing, and when you're in your 20s, there's no smarter place to invest than in the stock market. Time is on your side; you can afford to take the risk in return for the long-term reward upon retirement.