Starting to invest early in your working life is one of the best financial steps you can take. Decades of compounding can make even a paltry initial investment expand to a significant sum. Moreover, if your investments falter while you are in your 20s, they'll have four decades or so to recover before you stop working.
The Roth IRA is a retirement investing option that is open to anyone with earned income. So, as soon as you start getting a paycheck, you are free to open an account. The Roth IRA is a far more flexible option than the traditional IRA. For one thing, you can take principal out of the account any time you want without penalty. Though the purpose of the Roth is to save for retirement, if you find you need the money from contributions you've made, you can get at it without being taxed. The money you put into a Roth can be invested in stocks, bonds and mutual funds, as well as real estate, timber, precious metals and other more unusual choices.
Mutual funds are groups of investments that are actively managed by an individual or team. Funds typically contain stocks or bonds. Funds may be organized by type, size or status of company. For example, you can find large-capitalization, small-capitalization, energy and high-tech startup funds. Funds might also be organized by geography, comprised of foreign or emerging-markets assets.
Mutual funds are also classified according to objective. Growth funds contain riskier stocks and/or bonds that should generate higher returns over the long term. Income funds may be composed mostly of bonds that provide regular, fixed income and carry less risk. You can also find funds that offer a mix of growth and income. In your 20s, you may be advised to focus on growth funds, moving more of your money into income funds as you approach retirement. For example, consider a growth-to-income mix ratio of 80-20 in your 20s, 50-50 in your 40s, and moving toward 20-80 in your 60s and 70s, depending on your financial needs and appetite for risk as you age.
Stocks - Dividend Reinvestment Plans
DRiPs, or dividend reinvestment plans, represent a way for you to invest directly in the stock of a company. That means eliminating brokers and their ever-present fees. Not all companies offer DRiPs, but you can still choose from among more than 1,000 companies.
DRiPs can be ideal if you want to tiptoe into investing with less than $50 at a time or can spare only similarly small amounts of cash on a regular basis. In fact, you don't even have to buy a full share with each DRiP purchase. If a stock is priced at $45, and you have only $35 to invest each month, you can still participate. To find out whether a company offers a DRiP plan, contact its investor or shareholder services department.
If you have the stomach for it, your 20s are a good decade in which to put some money into riskier holdings that are a little or a lot more "out there." For example, timberland real estate investment trusts make money when trees are harvested. Since it takes trees so long to grow, timberland REITs are long-term investments. Returns depend on the price at which trees sell, a factor that can be impacted by the construction market conditions. Of course, if trees are felled by disease, fire or natural disaster, you stand to lose money. Obviously, this is not a place to park a lot of your money -- maybe 5 to 10 percent at the absolute most. Other considerations for this risk-be-damned segment of your investment portfolio might include leveraged ETFs, commodity ETFs, commercial property REITs, oil and gas limited partnerships and direct investments in gold and silver. If you're going to put significant sums at risk in these areas -- and 2 percent of your holdings could be considered "significant" if you portfolio is big enough -- consider discussing hedging strategies with a qualified financial advisor to protect against some of the downside risks in the investments you choose to dive in on.
D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.