6 Investing Tips For Your 20’s

Investing in your 20’s is a sure fire way of setting yourself up for successful financial years and decades down the road.  Not only does it set you up financially in the future, but it also jump starts your education in the stock market by investing at a young age.

The financial markets can be daunting with many competing ideas, philosophies, and strategies.  I started investing in my 20’s, and if I could do it all over again, here would be the six tips I would tell myself.

1) Never Invest With Paper Money

One of the big misconceptions in the investing world is that anyone can learn and practice via trading paper money.  Paper money is the concept of having your own account and placing trades and investments with paper (fake) money.  This is a big recipe for disaster.

Investing with paper money is a completely different game when compared to the emotions that come into play when you make your first investment with your hard earned money.  Any best practices gained from investing and practicing with a paper money account do not transfer over to real money investments and real money investing is a completely different game.

This is why I recommend to never practice any investments or trades using anything but real money. It creates bad habits.  You have chosen, in your 20’s, to invest your money so that it can grow over time.  The best course of action is the start developing good habits that can be used to grow your money for the rest of your life.  Trading with paper money can only develop habits that are not tried and true best practices that are created when real money is in play.

2) Keep Your Size In Check

A big part about investing in your 20’s is the ability to add on to compounding positive returns year after year.  Taking a 10% loss in your 20’s requires an 11.11% profit just to get back to even.

Losses will happen, and if they have not happened yet for you, they certainly will.  In order to maintain the ability to make money and compound returns year after year, you must keep your size in check as an investor.

The more you keep our size in check, the more bad positions are able to be isolated from the total value of your portfolio.  If you have a portfolio with 5 positions, all with 20% of your total portfolio value allocated to them, a 40% drop in one of those positions creates a total portfolio drawdown of 8%.  However, if we have 10 positions, all with 10% allocated to them, a 40% drop in one of these positions only results in a 4% total portfolio drawdown.

Over time, I have found that keeping all of my positions at under 10% of the total portfolio allows my single position losses to be isolated from the rest of my portfolio.

3) Always Invest For The Long Term

Investing in your 20’s give you an enormous edge compared to those who begin in their 30’s or 40’s.  Investing as early as possible allows the power of compounding returns to be more in our favor when compared to starting later.

Wealth and portfolio appreciation happen over the course of many years and do not happen in days, weeks, or even months.  Understanding the length of time required to double or triple a portfolio is important as it can help us choose more solid and less risky investments.

Smarter, safer, and less risky investments not only allow us to stay in the game longer, but those kind of investments also allow us to have a long term view.  If we have a long term view of those less risky investments, we will be less concerned with daily ebbs and flows of stock prices and more concerned with the long term outlook of our positions.

I have found that taking a long term approach, especially at a young age, allows investors to be less concerned about the day to day price swings and more concerned with the long term outlook of their investments.

4) Always Be Diversified

At this point, you are making small, long term investments with real money.  The more of these investments you make in your 20’s, the more you need to be diversified.

Diversification is simple.  By spreading out your capital amongst various stocks, bonds, and other asset classes, you significantly reduce your risk.

As an example, investing in ETFs rather than stocks is a way to diversify your holdings.  Rather than holding stock in Facebook, Amazon, Netflix, and Google all at the same time, you could simply buy a FANG ETF that will give you exposure to all four of those popular tech stocks and reduce your risk at the same time.

I recommend diversification through the purchases of ETFs as an excellent way of spreading out your risk.  Spreading out risk will keep you in the game longer and reduce the size of your drawdowns.

5) Continuously Contribute

Continuously contributing to your account is also an example of investing for the future.  Rather than taking leftover money after bills, housing, and entertainment and putting it in the bank, taking that money and adding it to your portfolio is not only an investment in itself but a way to continue to grow your portfolio over time.

The best way to look at continuous contributions is as additional investments in yourself and your future.  

The best way to contribute to your account is to do so weekly.  Even if the contribution is small in nature, say $10, that adds up to $520 a year which can be compounded for years if not decades!

Remember, you are investing in your 20’s in the long game, with a long-term outlook.  Continuously adding fund to your account will allow your account to exponentially grow over time.

6) Never Use Leverage

We have already spoken about the importance of keep your trade size small and showed you the math behind it.

Leverage is the ability to borrow money from others to invest greater amounts of money than the current amount of capital you have.

We recommend never using leverage as it is virtually impossible to keep your trade size under 10%.

Wrapping Up

Here are the 6 investing tips for your 20’s:

  1. Never invest with paper money
  2. Keep your size in check
  3. Always invest for the long term
  4. Always be diversified
  5. Continuously contribute
  6. Never use leverage

Follow these rules and watch your account grow safely for the long term.  Do you have any other investing tips for those in their 20’s?