One of the seven deadly sins of investing is something called market timing. It comes in several flavors. The first is where investors put off putting money to work in a falling market in hopes of getting better prices later. This leads to idle cash sitting on the sidelines and forgone appreciation. The second is selling after prices have declined significantly. Investors often wait too long to get back into the market and miss out on the market recovery. Finally, there are times when people chase returns. We saw this with bitcoin, and it ended in tears for many investors. In these cases, investors make decisions based on emotion. What starts with emotion generally ends with emotion.
The best time to get into the market, in my opinion, is as early as possible. Put time on your side and also avoid the mistake of trying to time the market. The long-term impact of saving and investing at a young age can be considerable and can make the difference between success and failure when it comes to saving for retirement. In addition, the coronavirus pandemic has strained our social safety net, so young investors need to be diligent in the event that assumed benefits are reduced in the future.
What are the consequences of waiting to invest?
The consequences can be substantial over time. Consider a 20-year-old investor who saves $2,000 a year for the 45 years to retirement. A reasonable estimate for wealth at retirement would be in the vicinity of $600,000. If that same investor started at 30 years old, they would end up with roughly half of that. In terms of saving for retirement it is that first decade that is the most important. (The analysis assumes the investor saves $2,000 annually (at the start of the year) and that the portfolio appreciates at 7% per year.)
What are the best tips/rules for investing in your 20’s?
- Maximize your company’s 401k if one is available. There are very few free lunches in investing, and this is one of them. If you work for a company that matches your monthly contribution and you maximize the percentage of your income that you save, it generates a meaningful boost to your retirement savings.
- If your current employer does not offer a 401k, you may want to consider looking into opening a Roth IRA or traditional IRA. The Roth IRA is a popular option for 20-somethings because they’re more likely to be in a lower tax bracket than they will be at retirement. As young people make more, their tax bracket will increase. So, they’re paying into those funds at the lowest tax rate today, and when they retire, they can take that money out without getting taxed.
- If possible, use a digital advice platform or consult a financial advisor. You can outsource the day-to-day management of your money to technology or a professional with the necessary expertise. A number of solutions available combine the two. Doing this comes with a number of benefits. First, it imposes a layer of discipline and structure that can help you avoid mistakes. Second, it is a big-time saver. Finally, good platforms offer useful saving tips and tools that make you both a better saver and investor over time.
- Start an emergency savings fund. The coronavirus pandemic has driven home the importance of emergency savings. Based on a recent poll conducted by Bankrate, only 18% of Americans have saved enough to endure six months without any income. Nearly 30% have no emergency savings of any kind.
- Make sure you are invested in a diversified portfolio that is suitable for your goals. Good digital advice solutions and investment advisors make sure this is how you are invested, and they will help manage your portfolio over time – as your needs and the markets change over time.
- Young investors may want to consider keeping short-term savings somewhere easily accessible, perhaps in places like a CD, high-yield savings account, or a money market account, to name a few. Putting short-term money in the stock market may not be the most efficient method if you need access to money in a couple of years.
- Evaluate the possibility of consolidating debt and paying it off. Today’s college graduates often enter the workforce with significant student loan debt. The situation gets complicated when you add in credit card debt, auto loans, and mortgages. Look for solutions that allow you to consolidate debt at the best rates possible and evaluate whether you should be more aggressive paying off the debt versus saving and investing.
- Use a round up app and start using it as early as possible. These services round up purchases to the nearest dollar whenever you use your debit or credit card. Then they invest the funds for you in a diversified portfolio. It is a great way to save and invest without even thinking about it.
- Consistently evaluate your spending and look for ways to reduce unnecessary expenditures that detract from your savings. There are apps available that can help you do this, and they often come with calculators where you can see the long-term effect of changes in your financial behavior.
- Invest in yourself. In today’s environment technology is changing at a rapid pace. Continually build skills and learn so you can be positioned to take advantage of the new opportunities that come your way. This is a great time to be an adult learner. They are many free or low-cost educational solutions available online.
Do these tips/rules apply to someone who is older?
They do apply to a wide audience of investors, but the benefit to those in their 20’s is much more pronounced because of the increased investment time afforded to young investors. As investors age, their focus begins to shift to things like withdrawal strategies in retirement, long term health care, parental care, and estate planning.
What are the investing mistakes that 20-somethings need to avoid?
There are many and this is why using a digital advice solution, or a financial advisor, is so important. You can avoid the mistakes of others and benefit from the collective expertise of the industry. Below are some mistakes to avoid:
- Ignoring your finances altogether. It is important to take the time to focus on your savings, spending, and investing behavior from a young age. Try to understand all of your financial goals and work to learn what is required to achieve them. Digital advice platforms can help you do this, often at a very reasonable price.
- Keeping up with the Joneses. Overspending for social and prestige reasons can quickly get anyone into financial trouble. Not only does it reduce from savings, it can result in expensive credit card debt that can get out of control.
- Concentrated positions in trendy investments. During the Dot Com bubble investors chased expensive Internet stocks and a lot of people got hurt. Stick with a diversified portfolio of low-cost funds invested in conventional asset classes, at least initially.
- Looking at your portfolio too often. Behavioral finance has revealed that investors experience losses roughly 2.5 times as much they do gains. As investors move to looking at shorter investment windows, (months to weeks to days) the stock market looks more and more like a coin flip. Longer term it goes up in most years. Constantly checking your portfolio can lead you to associate negative emotions with investing.
There is no doubt that today’s economic and social environment is challenging. I feel for the class of 2020 and the members of society who do not get a fair shake. It is important that we remember to think long term and stay focused on what we want from our financial lives. In subjects as far ranging as investing to the coronavirus, it is the little things, the collective behavior and many decisions that each of us make, that will determine our success or failure.
Investing involves risk, including possible loss of principal.
Returns represent hypothetical performance and do not guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted.
The subject matter in this communication is educational only and provided with the understanding that RobustWealth, Inc.® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.