INVESTING 101 FOR 20-SOMETHINGS
Instead of mapping out their future, most 20-somethings would rather live in the moment and spend money on immediate needs and wants. Retirement and financial security are not in their radar yet. While it is good to reap the fruits of your labor, this is also the best time to jump-start financial planning.
Disburse your funds accordingly. Many financial advisors will recommend diversifying your portfolio, more on risky investments, according to your current financial situation and goals. Since you are in your 20s and you can afford to take more risk, allocate around 10% of your capital to speculative investments. The potential reward or risk will be high. But in case of the latter, you have sufficient time to recuperate the losses.
Here are some investment vehicles that can generate fast money:
Stocks. Prefer companies that offer revolutionary technologies. Of course, it will be hit in a bear market, but because of innovation, not only the stocks will rebound, these will prosper. Take into account dollar-cost averaging if you opt to invest in a small-cap, which you perceive can become the next big thing in the market. That way, the risk is reduced and you will still have room for likely hefty returns over the long run because you will be purchasing additional shares at cheaper prices.
You may also use dividend reinvestment plan to large-cap stocks that pay consistent dividends and render more resiliency to bear markets. DRIP enables you to reinvest cash dividends by buying more shares on set dividend payment dates, or obtain stocks commission-free and at a considerable discount to the prevailing stock price.
Buying on margin. But this instrument is for extremely high-risk investors only. A trader uses leverage when buying on margin. However, the downside risks are utmost. You will face a margin call if your projections are incorrect. As a result, you will be forced to deposit more money or sell more assets. Even if the predictions are correct, the market is highly volatile, meaning it can remain irrational longer than you can stay solvent. The rule of thumb here is to avoid using margin to avoid incurring unnecessary debt.
For real estate, you can either own a property or invest in real estate investment trusts. In essence, REITs invest in a management team to run a property. Aside from a management team, you may want to invest in one that is in-line with current and future trends. This investment trust offer high dividend yields.
Leveraged ETFs sound appealing, especially for an average investor. Its earnings can be three times higher than a standard ETF. However, ETFs come with high expenses. The average expense ratio on an ETF is 0.46%, on a leveraged ETF 0.89%. Also, the three times potential return is daily, not yearly, less fees and expenses.
Now, after forming your investment portfolio, start saving for retirement as soon as you can. For tax-free withdrawals in the future, consider Roth IRA. Most importantly, do not forget to set aside 10% of each paycheck for your emergency fund.
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