Young Money: Investing in Your 20s

By Michael Berkowitz, Guest contributor

Common mistakes and the proper ways to invest in young adulthood told by financial experts

As we head into July 4^th weekend, I hope you have a great time with family whether in person or virtually. Inevitably the subject of money will come up as the different generations get together over some fireworks, grilling and downtime.

Several of our clients, including Dr. Guy Baker, Ph.D, founder of Wealth Teams Alliance (Irvine, CA),   Mark Rioboli, CFP, CFS,  Director of Wealth Management, Independence Advisors (Wayne, PA) and Matt Topley, President of Lansing Street Advisors (Ambler, PA) have been interviewed in the national media lately about investing advice for 20-somethings. Here are excerpts from their interviews.

Is now a good time for 20-somethings to be getting into the market? Why or why not and what are the consequences of waiting to invest?

Baker: Absolutely. Markets go up and markets go down. Now is the time to buy via dollar-cost averaging. There is nothing to make anyone think the markets won't increase over the next 50 years. The key is to NOT watch the markets day today. Invest in a widely diversified market-based fund and let it ride. Add as much as you can over time.

Rioboli concurred: No matter how high you think the market is, it will never be as high as it may be later in your life.  You can't time markets. Young people have such a long time horizon that moving into the market now is fine. If you are concerned about market volatility, you can dollar-cost-average into this market.

What are your best tips/rules for investing in your 20s?

Baker: Do not invest in target date funds. Invest in an all equity asset allocation fund. Be mindful of expenses and look for funds that buy both international and domestic.

Topley: Don’t get carried away with free stock-trading apps. Thanks to free online trading ups, young people and other inexperienced investors are jumping into this artificially supported market that is not based on fundamentals. Instead it’s being supported by record government spending on subsidized loans to businesses, extra unemployment checks and Federal Reserve purchases of trillions of dollars in investor debt. The stimulus programs that are supporting this market will not last forever.

Why do you recommend this strategy and why is it suited to a 20-something, rather than someone in their 30s, 40s, etc.? 

Rioboli: After stocking your emergency fund with 6 to 12 months of living expenses, I generally recommend a fairly aggressive allocation for 20-somethings. Early investors do not always have a good understanding of their cash flow. That’s why I suggest a slightly less aggressive allocation in the early years in case they underestimate their expenses and have to dip into their portfolio.

Baker has a different viewpoint: The investment strategy should be the same for anyone with at least 20 years to invest. When people get inside the 20-year mark, that is the time to change allocations and begin segueing towards a less risky portfolio.

Are there any investing mistakes that 20-somethings need to avoid?

Rioboli: Yes. Too often advisors recommend that young people load up on tax-deferred accounts. I generally don’t recommend investing solely in tax-deferred accounts. Twenty-somethings may face some capital-intensive years as they purchase a car or home or start a business. For this reason, tying up your money in tax-deferred accounts may not be the best idea.

Topley: Armed with free trading apps like Robinhood, the rush of new investors into the market is like the day traders who fed the dot.com boom of the late 1990s, before the market’s epic 2001 collapse. This will not last long.

Baker: Don't spend capital to pay off debts, especially student loans or credit cards. One dollar today at 7 percent will be worth $32 by age 70. So, every dollar that is taken from your long-term investment account to pay down debt or buy a car, or pay off student loans costs $32. Assume a car costs $20,000. If you use $20,000 of your investment capital to pay for the care, you are really paying $640,000 for that vehicle when you consider the opportunity cost of not having that $20,000 to invest.

Conclusion

All three of our experts agree on two things:

1. Never try to time the market, and
2. Focus on long-term holdings.

It’s perfectly okay to have a more aggressive portfolio when you’re young and already have a fully funded emergency fund. Making risky investments while you are young is beneficial for many reasons: a potential large payoff, enough time to recover from a loss, and self-educating. It’s vital to learn about investment opportunities and involve yourself in the stock market. Scared money makes no money.

What’s your take? We’d like to hear from you.

#Investing #stocks #younginvestors #MarkRioboli #GuyBaker #MattTopley