Time is an investor’s closest friend; with good resources and appropriate skills, the more time you have, logically, the more you are going to earn. The inflation is growing at an increasing rate, and markets are becoming more unpredictable every day. These conditions are indeed getting worse with the passage of time. Therefore, investment is a decent option to build a nest egg for your future. For young investors this is not only a good way to accumulate their wealth in future, but young investors can also supplement their income; save for a house; and/or save for college.
There are several investment options open to a young investor, for instance, saving in a back account, buying common stock, real estate, stock mutual funds, and short-term Certificate of Deposits. Each kind of option will have its own benefits and demerits; it depends on the investor’s purpose.
For example, if you are saving for your retirement and your age is 25 and you start with a $300 regular monthly deposit earning 9% annual rate for the next 40 years, till your retirement age of 65, you will accumulate approximately $1,420,000.
Therefore there are several key steps to be taken into account when investing. Here are 7 tips for young investors saving for the future:
1. Begin your investing activities as early as possible
The earlier you start investing in your life the less financial burdens you will have in the future. For example, spouse and kids expenses, mortgages etc. will come at a later point in your life in your late 20’s or 30’s. Hence, you can easily make a regular substantial monthly payment in the initial years of your youth. Investing early will also have more interest compounding, meaning you can invest in high risk – high return stocks.
2. Learn and educate yourself with the entire process
It’s essential to be familiar with the market, and understand the business you’re investing in. The example given in the beginning, $1.42 million may look a huge sum but its future value maybe equivalent to that of $40000 of today. Therefore for a couple that wants to use that money after their retirement for another 20 years or so will not benefit much. Therefore, it is essential that you know the process; the costs involved in the stocks and equity options.
3. Choosing between Stocks and Bonds
Young investors find it difficult to choose between bonds and stocks. Stocks are more risky but have a higher return than bonds in the long term. According to NBC News, in the 75 years from 1931 through 2005, large U.S. stocks earned annualized returns of 10.5 percent. That means, an investment of just $1 grew to $1,787. In the same 75 years, long-term U.S. government bonds earned returns of 5.5 percent. That meant an investment of $1 grew to $55.45. But bonds do have an advantage over stocks: the promise of payment. Where a stock may not have any form of payout in the future.
4. Learn to save rather than spend
To be an investor, you need money. To have money you need to save rather than spend. This advice is the most obvious one given out by top business professionals. Hence without ado, to be a successful investor you must do something that nobody in the world wants you to do: save some of your money instead of spending it.
5. Diversify your portfolio
Diversifying you portfolio means you must at all-time maintain a portfolio that is composed of all kinds of assets: from high risk to medium risk to low risk. The medium and low risk asset compensates the high risk one and the aggregate returns are generally higher than a single asset portfolio. The wise decision to make is to re-invest your returns to earn greater returns, rather than spend those returns. For an investor, this is the best way to prevent a massive setback. Numerous studies have determined that asset allocation is the most important aspect affecting performance and volatility of your investment. In fact, 91% of the portfolio return is based on asset allocation, just 2% on market timing, 5% on stock selection and 2% on other factors.
6. Manage your savings and your debts
Some people make a bad habit of spending money based on future expected inflows. This is clearly a mistake, relying on a raise in income that has not yet been confirmed. Therefore, always choose to spend your money based on your actual and current financial state as this can prevent some serious credit crunch issues in the future and spare extra money for investments.
7. Get to know the taxes and inflation
Mostly Investors forget how much inflation and taxation can affect their returns. Inflation will impact your real returns; if inflation is high real returns will be low. The future inflation rate will also impact your future earnings. For example, if you have earned a return of 21% in a year on your portfolio and the inflation is 17% for the year, you have actually earned 4%. Therefore, inflation affects returns badly. There are asset options that are either have a tax liability or are a tax- deferred account. Make sure you know your tax policy and that a tax-deferred account will build wealth faster than a tax-liability account.
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