Investing while you're young gives you the gift of time -- time to ride the ups and downs of the market. Even small amounts saved early in life will compound and grow over the years. Educate yourself, and stick with investments you understand, and you'll be on your way to building a solid portfolio.
Time is On Your Side
Investment earnings compound over time, and the sooner you start to invest, the more time your money will have to grow. Investments you don't need to access for a long time have time to recuperate from market declines, and can be invested in equities, or other higher risk vehicles like corporate bonds or real estate, that have the potential for great rewards. If you need to access your money in the short term, like for a home improvement or new car, you should put that money in stable investments like money market funds or certificates of deposit (CDs).
Taxable vs. Non-Taxable Accounts
Since retirement accounts are subject to contribution limits and cannot be withdrawn until reaching a minimum retirement age, you will also have to invest some money in regular, taxable accounts. Use your tax-benefited retirement accounts, such as a non-taxable Roth IRA or a tax-deferred traditional IRA or 401(k), for those investments that show the greatest promise for high returns. Use your taxable accounts for funds you need to access sooner and for additional investments that exceed the retirement account contribution limits.
Buying your own home is one of the smartest ways to invest. You put money into your home every month when you pay down your mortgage, and you gain capital appreciation as home values rise over time. But home ownership is only smart if you treat it as a long term investment, so you can wait out dips in the market. Keep in mind that buying or selling a home involves transactional costs like mortgage closing fees and real estate commissions, which is one reason why real estate is rarely a smart short term investment.
Invest in What You Know
You need to understand your investments so that you pick the right ones, and know when to sell. Learn the risks involved in any type of investment before you buy. With individual stocks, it is also a good rule of thumb to select stocks in familiar companies. If you own an iBook, iPod and iPhone, and notice that other people are also zealously purchasing Apple products, you might be inspired to buy Apple stock. If you don't know the first thing about being a landlord, or about home maintenance, income properties are probably not a smart investment for you. If you don't understand how foreign exchange, commodities or option markets work, then they are not a smart investment unless you research them first.
Education is the key to smart investing. You don't need to pay a financial adviser, but do attend free lectures, or talk to a friend who knows finances. Read everything you can get your hands on, from the prospectus for a mutual fund, to articles in reputable magazines and newspapers. Consider joining an investment club, where you pool resources and knowledge with other young investors. When you are well-informed, you'll know where and when to invest.
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.