Investing is an excellent way to build wealth and plan for your financial goals. It’s also the primary method for saving for retirement, and it can help you reach many other financial milestones along the way.
Young people have a considerable advantage when it comes to investing. By starting in your 20s rather than waiting until later decades, you have the potential to grow significantly more wealth, take advantage of technological innovations, and take on slightly more risk.
Learn what investing looks like in your 20s and the advantages of starting early.
Investing in Your 20s
Before discussing the benefits of investing in your 20s, it’s important to understand what that actually looks like.
Investing means putting your money into financial products and hoping for a return. While investing tends to have a greater return than saving, investments generally aren’t federally insured like savings accounts.
Common investment products include:
Most people get their foot in the investing door through an employer-sponsored retirement account, like a 401(k) or 403(b). While people often refer to planning for retirement with the word “saving,” you’re actually investing when you put funds into a retirement-focused account. You can also invest for retirement on your own through an individual retirement account (IRA), rather than an employer-sponsored plan.
Retirement accounts are tax-advantaged, meaning either your contributions are tax-deductible or you can withdraw your earnings tax-free during retirement, depending on the type of account.
Many people also invest through taxable brokerage accounts, which can be used to purchase a variety of assets. These investments are made with after-tax dollars, meaning you will end up paying taxes on your earnings.
When it comes to investing, new and experienced investors alike have a few options to consider.
- You can work with an investment professional who will recommend certain investments based on your financial goals.
- You can choose your own investments using an online brokerage account, many of which have investment apps for your phone.
- You can use a robo-advisor—a digital tool that automatically chooses investments based on your predetermined financial goals.
The Impact of Compounding
Perhaps the most significant benefit of investing in your 20s is the impact that compounding will have on your portfolio. Compounding occurs when you reinvest your earnings, and those earnings begin to work for you, earning you more money. Thanks to compounding, you can invest less each month from an early age to end up with the same amount during retirement, if not more.
For example, let’s say your goal is to have $1 million by the time you retire at the age of 65. In this instance, let’s assume you earn an annual stock market return of 10%.
If you start investing at age 25, you would only have to contribute about $190 per month to an investment account to reach your goal of $1 million by age 65. If you waited until age 35, you’d have to contribute over $500 per month. And if you waited until 45, you’d have to invest nearly $1,500 per month to reach your goal.
Learn Lessons Early
No one is an expert when they’re a beginner investor, no matter their age. Whether you start in your 20s or your 50s, there’s bound to be a bit of a learning curve. The benefit of investing in your 20s is that you often have the opportunity to make mistakes and get them out of the way while you’re young and (in most cases) have less responsibility.
Making a costly mistake with your portfolio at 50 could seriously set you back on your retirement journey or a financial goal, like paying for your child’s college education. But making that same mistake at 20 gives you plenty of time to recover losses. You’ll have learned your lesson, with more time to bounce back.
Your Tech-Savvy Skills Will Come in Hand
Generally speaking, younger generations tend to be considered more tech-savvy than older generations, and that trend is no different when it comes to investing. For example, younger investors may be better at navigating trading apps or relying on technology for managing their investments. For evidence, we can look at the rise in popularity of robo-advisors.
The first major robo-advisors only date back to 2008, yet the industry is expected to reach a value of $1.5 trillion by 2023, according to data from InsideBitcoin, a cryptocurrency-focused education and news portal. Leading the interest in robo-advisors are one specific group of individuals: millennials. According to a 2018 Charles Schwab survey, millennials outnumber both Baby Boomers and Generation X combined when it comes to the use of robo-advisors. Users report that these digital investing tools have helped them take the emotion out of investing, giving them more time to focus on their families, and have also given them better peace of mind about their finances.
While the popularity of robo-advisors is increasing, Americans still value person-to-person service. More than 70% of people want a robo-advisor that includes human advice, and 45% would be more inclined to use one if human support was easily accessible, according to Charles Schwab.
Now, after robo-advisors have been in the financial market for more than a decade, older investors are starting to take notice in larger numbers: nearly half of Boomers reported that they plan to use a robo-advisor by 2025.
Investors in their 20s may also be more aware of tech-driven companies that have disrupted industries. These companies may make for smart investments if they continue to innovate and grow for years to come. For example, Uber and Airbnb disrupted the taxi cab and home rental/hotel industries, respectively. Both are public companies that investors can buy shares in. If they continue to innovate and grow, investing in them now could pay off in 20 or 30 years. Though not guaranteed, 20-something investors have more time to take on this type of risk.
Longer Timelines Allow for More Risks
Your time horizon refers to the expected amount of time before you plan to use the money you’re investing. If you’re currently 25 and plan to retire at 65, then your time horizon is 40 years.
Those with a longer time horizon—like young adults—have the opportunity to take on more risk, since they likely won’t need the money for many years, according to the Securities and Exchange Commission (SEC). Look at the 2008 recession, for example. The Dow Jones Industrial Average fell by more than 50% over the span of 1.5 years before it began steadily increasing again. It wasn’t until the first quarter of 2013 that the market reached pre-recession levels.
Those who were preparing to retire when the recession hit had their portfolios significantly impacted. And if all of their retirement savings were in the stock market, they very well may have had to postpone retirement. On the other hand, those in their 20s were less impacted. By April 2021, the Dow grew to more than double what it was before the recession. Those investors who were young during the 2008 recession and maintained course have seen their portfolios bounce back spectacularly.
Another benefit of these long time horizons is that even when you invest when the market is at an all-time high, you can still trust that you’ll see a return. Throughout history, the stock market has recovered from every market correction and recession, and has consistently trended upward over time. If history is any indication, we can trust that the market will continue to increase and that today’s all-time highs will be overshadowed by new all-time highs in the future.
Precautions Are Still Important
Investing in your 20s gives you the unique benefit of a long time horizon, meaning you can afford to take on more risk, and your money has more time to compound. But that doesn’t mean it’s safe to throw caution to the wind. Every type of investment carries some level of risk. And while higher-risk investments may have greater potential for high returns, they also increase your chances of losing your money entirely.
As you’re investing in your 20s, consider the long-term. Holding a bad investment for a long time won’t turn it into a good one. You’ll only experience the benefits of compounding if your investments actually perform well. Look at the performance history of an investment before deciding if it’s right for your portfolio.
According to the SEC, some high-risk investments are not appropriate for investors, including margins, options, and short sales. Other high-risk behaviors include investing in “manias”—investments that have garnered a lot of hype from platforms like social media—or investing without data to back up your decisions.
One of the best ways to invest with caution is to diversify your portfolio. If you choose to take on higher-risk investments such as Bitcoin or the latest meme stock, you can reduce your chance of loss by keeping the majority of your portfolio in tried-and-true, long-term investments that have historically performed well.