Investing in your 20s is one of the best decisions you can take to secure a comfortable future. There is an advantage of time which allows us to gain experience and develop skills.
Here’s a classical example of how time influences investment:
- If you invest $20000 at the age of 20, it would grow to over $140,000 by the time you turn 60 (based on a 5% interest rate).
- That same $20,000 investment made at age 30 would yield about $48,000 by age 60. This simply shows that the longer you invest your money, the more wealth it can generate.
That being said, most young people make mistakes as they venture into investing. This article will address the 5 most common mistakes made by young people in their 20s during their investment journey and how to avoid them.
Failure to learn first
One of the main drivers of success is being teachable. It is important to understand the financial securities before putting your money into them. Most young people make the mistake of being too ambitious, depriving themselves of enough time to learn about the financial markets.
There are many instruments to choose from. Stocks, exchange-traded funds (ETFs), mutual funds, commodities, currencies, bonds and derivatives. For beginners, ETFs are favorable; these are investments that provide exposure to a portfolio of investments that make up a particular index such as Vanguard Total Stock Market ETF and SPDR S&P 500 ETF Trust. However, most young people tend to start with highly volatile stocks and currencies because they want to make fast money only to be burned at the beginning of their journey.
Being driven by emotions
Due to lack of experience, newbie investors let personal feelings and emotions affect their decision making. Emotions lead to investors panic selling their holdings forgetting the initial plan they had when they entered into a position.
Behavioral finance recognizes that investors often behave irrationally. They use their emotions and make biased judgments. The report states that if we understand our biases, then we can overcome emotions. You can only master this over time in investing.
Young investors should have an investment strategy, follow it, and never make decisions based on immediate emotion.
Failure to diversify portfolio
Many investors in their 20s try to beat the market by investing aggressively into one performing stock, only to be disappointed when the stock loses the gains overnight. Portfolio diversification ensures that by not “putting all your eggs in one basket,” you will not be creating an unwanted risk to your capital.
As an investor, make sure that you have a diversified portfolio. This means ensuring that you spread your capital amongst different investments. The key benefit of diversification is that it helps to minimize the risk of capital loss to your investment portfolio. Young investors should consider investing in stocks, mutual funds, bonds, and also cash in their savings accounts.
Misuse of leverage
Leverage is simply a credit that brokers give to their traders to enable them to open large trades, which are often more profitable. Using too much leverage has its benefits and its shortcomings. A bullish market will mean more returns. However, in a bearish market, using too much leverage can crush even a well-organized portfolio.
That said, as an investor you should acknowledge that the higher the risk, the greater the level of knowledge and experience required to manage the risk, which becomes even more important when using leverage. For beginners, it is wise that they avoid using leverage until they are experienced enough to do so.
Lack of planning
Proper planning is one of the key ingredients for successfully investing money in your 20s, says John Cunnison, chief investment officer at Baker Boyer.
It is important to strategize on when to contribute and how much to contribute to your investment portfolio. This gives you a map to follow and will surely lead you to the right destination. An investment plan gives you the ability to monitor your performance, reflect on outcomes, and also refine your approach.
Investing In Your 20s: Grab The Opportunity
Investing in your 20s is a huge opportunity. But you must play your cards right and avoid common blunders that can sabotage your success.
To avoid being part of those who fail in the financial markets:
- Give yourself time to learn about the financial markets
- Avoid using feelings in making trading decisions
- Never put all your eggs in one basket
- Leave leverage for the experienced traders
- Have a plan before investing
Sidestep the bloopers, invest wisely, and reap the rewards.
Author Bio
Sizolwenkosi Genius Dube is a freelance finance content writer. His mission is to help people achieve financial freedom and live the life of their dreams. When he isn’t knee-deep in the banking trenches or keeping an eagle eye on the financial markets, he watches his favorite soccer team. Connect with him via Twitter and LinkedIn
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