The stock market can be a perilous place for young adults. The major indexes have experienced wild fluctuations in recent years, and this turbulence can make it difficult for novice investors to know where to put their money. That said, young people who invest early stand to earn strong returns as they age—if they do it right.
Here are some strategies that young investors can use to build their wealth.
Research, research, research.
Young adults have the luxury of time on their side—they don’t need to set up a retirement account just yet because they have 40+ years before that starts to matter. Instead, they should focus on building an investment portfolio now so they can watch it grow over time.
Look at long-term strategies
When it comes to choosing an investment strategy, young investors should look toward long-term strategies with low fees, including index funds and ETFs (exchange-traded funds). Index funds are created by neutral third parties that track the performance of a section of the market. They offer investors diversified portfolios at lower costs than actively managed funds. In 2016, index mutual fund and ETF assets totaled $9 trillion in the U.S., according to research firm Statista.
Learn about the stock market
Young people who are just starting to invest may not know where they want to put their money yet. For some, a key goal is simply avoiding losing money—which can be enough incentive for young investors to start researching and learning about the stock market.
Forbes suggests: “Finding a good financial adviser can also help you get started and build an investment portfolio.”
Don’t invest more than you can afford to lose
It’s important for adolescent investors to remember that the stock market is inherently volatile. Even if your research suggests that a certain sector or industry has potential, it can be wise to limit just how much of your money you invest in individual stocks. It’s best to put most of one’s money in the market through index funds and other investments that offer more diversified portfolios.
Avoiding market timing is key
Investors in their 20s may not want to hear this, but the stock market isn’t always the best place for young adults to put money right now. Many investors are worried about a recession hitting, so young people would be wise to limit how much they invest in the market while the economy is uncertain.
That said, it’s never a good idea to wait for a stock market crash before investing. That can be a costly mistake—especially for younger people who have time on their side. In fact, the S&P 500 has been up on average by 11% per year since 1928.
Be mindful of fees
Young investors should never invest in anything that charges exorbitant fees or commissions, as these can quickly eat into returns. Instead, they should look for low-cost investments that offer diversified portfolios with fees of 1% or less.
Don’t chase the hot stocks
Young people often see that an industry is doing well and want to invest in it. However, they should be wary of “hot” industries. If you’re tempted to invest in one of these areas because you believe it’s going to be a winner, think again—it could just as easily plummet if certain trends reverse, as we’ve seen in recent months with the ongoing decline of social media stocks.
Avoid high-risk investments
Young investors should steer clear of anything that sounds risky or falls outside their comfort zone. That may mean skipping out on new and emerging industries like cryptocurrency and cannabis unless they truly understand what those investments entail and how they work.
Also, keep in mind that the stock market isn’t the only place you can put your money. Young adults should diversify their portfolio with investments like real estate and bonds too. And they should always make sure to save some of their earnings—and avoid spending more than they have through credit card debt or other loans.