Top 7 Investment Strategies for Young Adults

Why Is It Important For Young Adults to Start Investing Early?

Why do people make such a big deal about investing at a younger age? It's because the key to investing is time. The younger you are, the more investing will work in your favor, especially with compound interest.

Compound interest is when interest builds off interest. Suppose you put $1,000 into a savings account, and your financial institution pays you 4% back in annual interest. You would earn $40, resulting in $1,040 per year. Compound interest is when you earn interest not just from the $1,000 you invested initially but from your investment and the interest earned from your financial institution. That means your investment will start building from $1,040 instead of $1,000 the next year you invest, and the cycle will continue from whatever interest you earn the following year.

Another way that time is essential for your investment strategy as a young adult is to ride out the stock market's ups and downs. When innovative companies like Apple and Microsoft began, people likely had no idea they would become the powerhouse tech companies they are today. Investors who took a chance and purchased stock early on have reaped a harvest of millions of dollars because they were willing to take a risk and had time on their side. While not every stock you invest in might be as successful as this story, it is worth it as a young adult to try to navigate the stock market now instead of waiting until you're older to give yourself more chances to see what will happen.

What Are Some Investment Strategies That Are Ideal for Young Adults?

Now that you understand the power of compound interest and embracing the stock market, it's time to determine your investment strategy. Remember, having an emergency fund and paying off as much debt as possible is always a good idea before committing to a rigorous investment plan. If you need more certainty about managing your investments on your own, feel free to start your journey with the help of a financial counselor. Here are some investment strategies to help you make the most of your money.

Determine Your Timeline

While being a younger investor means you're likely aiming to invest for long-term goals, it is essential to know your investments' length and timeline. Maybe you want to assist your children with college tuition or take a dream excursion with your spouse on your anniversary. Your investment goals could also be short-term, such as continuing to build your emergency fund or wanting to pay for a new car. Whichever type of investment you choose, it is vital that you set a date and how much you want to save.

Be Willing to Take a Risk

When you think of money and taking risks, your first reaction might be that these don't go hand in hand. We agree with you—most of the time. Investing creates a unique opportunity to take a risk with your savings by allowing you to enter the unknown of an ever-changing and sometimes volatile stock market. If you're new to investing, you might feel overwhelmed by the threat this might cause your financial stability, especially if you've been working hard to prepare for unexpected events by growing your savings and paying off debt.

Sometimes, investing can get out of hand and become dangerous if you risk too much. That's why it's essential to know your risk tolerance. Depending on your personality, you might have no problem taking a risk on your money to see what will happen, or you might be struggling with surrendering your money to an evolving market. Assessing your risk tolerance before investing is critical to knowing what type of investments you want, and your financial counselor can help you decide which investment options go best with your long-term and short-term goals. As you consider risk, it is also important to remember that your investments are not insured by the National Credit Union Administration.

Diversify Your Investments

To prevent yourself from risking too much, it's vital that you diversify your investments. It may seem tempting to put all your money into a stock you think will receive a higher return than a bond or mutual fund, but doing this would mean you have the chance to lose all your money if the stock doesn't perform well. This example is why including diversification in your investment strategy is fundamental since you're minimizing your risks and maximizing your returns by adding different kinds of investments to your portfolio. Having stocks, bonds, mutual funds, and exchange-traded funds (ETFs) allows you to invest with confidence since you know your money is growing across multiple industries, companies, and cities.

Try to Buy-And-Hold

Since time is on your side as a younger investor, you can buy-and-hold your investments. You purchase your investment, such as a stock, and keep it for several years. This strategy gives your investments ample time to grow, no matter how much the market fluctuates.

Implement Dollar-Cost Averaging

Whether you contribute to your investments weekly, monthly, or yearly, including any extra money you have towards investing could be beneficial in the long run. Dollar-cost averaging is when you consistently purchase investments with that money. Depending on your budget, it can be as little as $100 or closer to $1,000, to which you contribute. This strategy protects you from paying for expensive stock by keeping you from investing with everyone else since you're willing to purchase no matter what fluctuations the market is causing.

Grow with Index Funds

Index funds, which consist of either an ETF or mutual fund and follow a market index, could be an excellent addition to your investment strategy. An example of a market index is the S&P 500, which tracks how well the shares and stocks are doing for companies across the United States. Other market indexes are the Dow Jones Industrial Average or the MSCI EAFE. Investing your money in index funds diversifies it by copying how these significant shares and stocks perform.

Don't Miss Out On Your Retirement

As you consider all your investment choices, remember your retirement. Many retirement plans exist, such as an IRA or 401(k). Check to see if your employer offers a match on your contributions; if they do, don't miss out! Take advantage of the chance to get free money for your investments.

What Common Mistakes Should Young Investors Avoid?

As you learn the best strategies for your investment plan, it's also helpful to know what actions to avoid. Keep these things in mind as you begin your investment journey. 

1. Half-Hazard Investing

There is no reason for you to be on the edge of your seat every hour of every day worrying over how well your investments are doing or checking the stock market. However, it would help if you were cautious of being too careless with your investments. You could be losing out on potential opportunities and allowing yourself to be unaware of any threats to your portfolio by not checking in regularly.

2. Investing Too Much

Self-control is vital when it comes to investing. While you want to diversify your portfolio, you don't want to invest anywhere and everywhere. Be sure to limit yourself on your number of investments, and consult with an investment professional about what you should change in your investing strategy.

3. Timing the Market

If there is one key thing you take away from reading this blog about investing, it should be this: never try to time the market. There will be times when you want to take your money out of investments because of a sharp decline in the market. By doing this, you could miss the opportunity for a great return when it goes back up later.

How Can Technology and Apps Help Young Adults With Investing?

Navigating how to track the stock market and your investment portfolio can be intimidating. Technology makes investing more accessible by providing apps to check your accounts anytime. Here are some you could try:

• Empower is a free investment management app where you can see all your investment accounts and their expense ratio.
• Simplifi by Quicken allows you to look at investments, your budget, and credit. There is a small fee for the app of $2.00 per month.
• Stockpile is an app that helps kids learn how to invest. It has a monthly fee of $4.95.
  

Develop Your Investment Strategy with Leaders Credit Union

Are you ready to begin your investment journey now that you know more about investing? As you enter the investing world, don't hesitate to ask questions or reach out for help. Leaders Credit Union has a team of investment champions who can help you formulate an investment strategy that meets your long-term and short-term goals. Check out our free Investing 101: A Guide to Growing Your Wealth.