What's the best way to invest when you are younger? There is no one-size-fits-all investment strategy for people in their 20s and 30s but there is no doubt that mutual funds are one of the best investment types for young people.
In this article, we'll explain why mutual funds can be the best investment types for young and beginning investors and specifically which mutual funds are best for investors in their 20s and 30s.
Why Mutual Funds Are Best for Young Investors
Here are the primary reasons why mutual funds are ideal for young and beginning investors–
Not that young people can't handle complex financial concepts, it's that most investors in their 20s and 30s don't have complex financial needs. And because mutual funds are easy to research and buy, they make good choices for young investors.
Since mutual funds hold dozens or hundreds of other securities, such as stocks and/or bonds, a young investor can get started and do well with just one or two funds.
There is very little money or financial skills necessary to buy mutual funds. In fact, there are many low-cost funds to get started investing. For such funds, you usually don't require a broker or advisor to buy them. The only thing needed to invest in mutual funds is a little money and a little time to open an account.
For example, Fidelity has some index funds that require no minimum investment, have no minimums to open a Fidelity account and charge zero expenses ratio.
But mutual funds are not just for beginners or young people. They are used by professional money managers and expert investors around the world.
Best Fund Types for Investors in Their 20s and 30s
Assuming young investors are saving for a long-term goal, such as retirement, there is likely a time horizon of up to 30 years or more. Although all investors should be aware of their own investment objectives and risk tolerance, the longer you have until you need your money, the more aggressively you can invest.
Here are the basic types of funds that young investors are wise to consider:
Target Date Mutual Funds:
As the name suggests, Target-Date Mutual Funds invest in a mix of stocks, bonds, and cash that is appropriate for a person investing until a certain year. As the target date approaches, the fund manager will gradually decrease market risk by shifting assets out of stocks and into bonds and cash, which is what an individual investor would do manually themselves. Therefore, target-date mutual funds are a type of "set it and forget it" investment.
For example, if you are saving for retirement and think you may retire around the year 2045, you may consider a 2045 target date fund such as Vanguard Target Retirement 2045 (VTIVX).
As of March 31, 2021, the fund has 88.63% of its assets in stocks and only 10.42% in bonds. This investment will skew more towards bonds and away from stocks as the target date approaches. Minimum investment required for this fund is $1,000 and it charges an expense ratio of 0.15%. Vanguard says this fund could be an option for those “planning to retire between 2043 and 2047."
Sometimes target date funds invest in other mutual funds and both funds charge fees, making the target date fund expensive. Higher expenses impact fund returns.
Balanced funds are also called hybrid funds or asset allocation funds, these are mutual funds that invest in a balanced asset allocation of stocks, bonds, and cash. The allocation usually remains fixed and invests according to a stated investment objective or style.
For example, as of March 31, 2021 Fidelity Balanced Fund (FBALX) had a portfolio invested 67.79% in stocks, 24.73% bonds, and 3.12% cash and other assets. This is considered a medium risk or moderate portfolio.
Index funds are mutual funds that passively track the composition and performance of an index such as the S&P 500. They can be a great place to begin building a portfolio of mutual funds because most of them have extremely low expense ratios and can give you exposure to dozens or hundreds of stocks representing various industries in just one fund.Therefore, you can meet the initial goal of getting a low-cost, diversified mutual fund.
For example, Schwab S&P 500 Index Fund (SWPPX) tracks the returns of the S&P 500 index. As of March 31, 2021, the fund’s 3-year annualized return was 16.75% compared to 16.78% for the S&P 500, while its 5-year return was 16.25% versus 16.28% for the S&P 500. The fund has no investment minimums and has an expense ratio of 0.02%.
Where Young Investors Can Buy Mutual Funds
Any investor, assuming they are at least 18 years, can buy mutual funds at virtually any fund company or brokerage firm that offers them.
One place to start for anyone who wants to invest without an advisor could be one a no-load mutual fund company. "No-load" funds are those that do not charge commissions, which are only necessary to pay if you are using a broker.
“No load funds” may not charge sales load but could still impose other fees or expenses.
You will want to consider mutual fund companies that have a wide variety of mutual fund categories and types because you will need to continue building your mutual fund portfolio for the purposes of diversification.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.