As a young professional, you probably already know the value of budgeting, saving money and making good financial decisions. Managing your personal finances is equally important. There are some basic investment strategies for young adults that can help pave the way to a more secure future.
Financial Instruments and Diversification
There's an old rule of thumb that you should subtract your age from 100 to know the percentage of your portfolio that should be kept in stocks. If you're 28, for instance, you should keep 72% of your portfolio in stocks and the rest in other instruments such as bonds and savings accounts. This is because stocks are more volatile and can fluctuate more easily with the market than more stable financial instruments such as bonds or savings accounts. Younger adults are able to be more aggressive and risky with their investing strategies than older adults because they have more time to ride the stock market's ups and downs. In fact, many financial planners suggest that the rule of thumb should be subtracting your age from 110 or even 120. If you want to build wealth, stocks are a good way to do so because even though they carry more risk, they also carry more long-term reward. Bonds and savings accounts, on the other hand, provide more secure forms of investing but at a much lower potential return. The key is diversification. Invest in a variety of different instruments to ensure you have access to cash as well as long-term growth options.
If you take the advice to invest most of your portfolio in stocks, the challenge becomes choosing which companies to invest in. There are a number of different types of stocks to buy. Many investment professionals suggest a mix of stocks in different sectors such as technology, health care, retail and manufacturing, as well as a mix of large-, medium- and small-cap stocks, a mix of growth and value stocks, and a mix of stocks that do business in different countries. By diversifying your stock portfolio, you are less vulnerable to sudden downturns in any specific company or sector. If you don't feel comfortable picking your own individual stocks, you can choose to invest in mutual funds or exchange traded funds. Whatever you do, always do your homework. If you want to invest in a particular stock, research it to learn all you can about its sales and earnings growth, balance sheet, management team and competition.
It is also important to keep an emergency fund in cash. A constantly reiterated phrase in the personal finance world is "pay yourself first." Simply put, this means putting a little bit of money aside each month before you pay any of your other bills. No matter how much credit card or student loan debt you might have, it's a good idea to place some of your paycheck -- even if it's just a few dollars -- into a rainy day account. Treat this as an expense by thinking "I owe myself $50 this month" or whatever the figure is. The key is to save this money in a high-interest savings account, a CD or a money market account. You'll gain interest and help prevent against the effects of inflation.
Even though you are decades away from retirement, it's never too early to plan for your golden years. Investing in your retirement early on in your career is an excellent strategy to building long-term wealth. If your business sponsors a retirement plan, such as a 401k, make sure you contribute, especially if the company also matches all or part of the contribution. Otherwise, set up a Roth IRA and contribute part of your paycheck every pay period to it.
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