Getting started with investing in your 20s and 30s
One of the biggest misconceptions about investing is that you need to have a lot of money to get started. In fact, people in their 20s and 30s are wise to start investing early, even in small sums. This allows you to take advantage of compound growth and develop good investing habits that can be used for the rest of your life.
Both are important, especially considering that life expectancy continues to increase, which means retirement savings will need to last longer. Investing early can help to ensure a comfortable retirement.
Another good reason to start early is simply to learn about investing concepts, about your own risk tolerance and the investing styles that suit you. Going through a market correction and recovery cycle will also help you to see that volatility is normal and not a reason for drastic action.
Here are some strategies for new investors in their 20s and 30s.
Save money for the short term, invest for the long term: These principles apply to investors at any age, but especially when you're younger, either just starting out in a career, starting a family, or both. You need to save money for short-term costs such as rent or mortgage payments, as well as everyday living expenses. It's also important to maintain an accessible emergency fund in case of the unexpected. At the same time, you should be putting a bit of money away for longer-term term goals, such as retirement. Short-term savings should be in less risky investments, such as cash or guaranteed investment certificates (GICs), while longer-term investments should go into stocks and bonds, either individually or through mutual funds or exchange-traded funds (ETFs). While stocks and bonds are more risky than GICs, the longer-term returns are often more rewarding.
Don't let market fluctuations deter you: The possibility of losing money in the market can be scary, especially when you're just starting out as an investor. But the benefits of investing early and riding out market fluctuations can pay off over the long term. Starting early gives your investments more time to grow. It also gives you more time to make up losses than if you began investing in your later years.
Diversify your portfolio: It's best to invest in a diversified, long-term portfolio of stocks and bonds. With stocks, try to invest in a variety of industries, instead of putting all of your money in a single sector such as resources, banking or technology. Often, in investing, as one sector goes down, another goes up as investors look for new places to put their money. ETFs and mutual funds are simple ways to achieve diversification across sectors as well as geographies.
Know your asset allocation and rebalance as needed: There's an old rule of thumb that the percentage of equities in your investment portfolio should be your age minus 100. That means a typical 30-year-old investor should have 70 per cent of their portfolio in equities, and a 60-year-old should have 40 per cent. The rest would be in high quality government and corporate bonds and other less risky assets. In today's low interest rate environment, many investors are more heavily invested in equities to try to get better returns. It's a good idea to set a target asset allocation — which is the percentage of your portfolio that will be in stocks, bonds and cash — and rebalance regularly. Your mix will depend on your individual risk tolerance and your time horizon. That said, most experts recommend being more heavily weighted to stocks in your younger years, then lowering that percentage as you get closer to retirement. The idea is that you want your portfolio to be less susceptible to market swings when you are nearing or in your retirement years.