People in their 20s need to do more than choose a single stock, bond or mutual fund as an investment. Their best investment is in a well-rounded financial approach for themselves. By using several strategies at once, a good investment has a chance to succeed. Several types of investments make good sense for investors in their 20s if they are committed to a lifetime of investing.
A good investment to start with is a money market account or money market fund. These investments pay interest and are among the safest in terms of preserving money. This can give people in their 20s a rainy-day fund to cover unexpected expenses and emergencies. This will help prevent having to pull money out of other investments to take care of a crisis.
It may be hard to think about retirement for people in their 20s, but the habit of setting aside money in a retirement account can pay big in later years. Whether it's a 401(k), traditional IRA or Roth IRA, a retirement fund can earn money over decades and make people in their 20s millionaires when they retire. Even small amounts invested in a bank account that pays compound interest can create a large retirement fund later. Compound interest means when you earn interest in an account it's added to your total. Then you earn interest on that new total. In other words, you earn interest on your interest. Over many decades this can result in a comfortable nest egg. Some investments pay quarterly, some monthly and some even pay daily. The sooner your interest pays, the sooner compounding begins.
Automatic Stock Investment
Another tactic is using dollar-cost averaging to buy the stock with a growing company. The investor puts the same dollar amount into the stock each month or quarter. If the share price has gone up, the investor gets fewer shares. If the share price has gone down, the investor gets more shares. This creates a low per-share average over time. For example, a person can buy $1,000 worth of a stock at $20 a share and get 50 shares. The next month, the stock may have gone up to $25 and the investor's $1,000 buys 40 shares. If the stock drops to $15 the following month, the investor buys 66 shares for $1,000. Through three purchases, $3,000 bought 156 shares for an average of $19.23 per share. Over a lifetime, this approach can help an investor weather the ups and downs of the stock while building investment value.
An Index Fund
An index mutual fund buys all the stocks of the index it follows. For example, an S&P 500 index fund buys all 500 stocks of the S&P index. Young investors who expect the stock market to go up in general over the decades can buy shares in an index fund and benefit from that rise because they often don't need income from the investment. They can afford to ride out the peaks and valleys of the stock market.
Real Estate ETFs
Young investors who believe real estate will remain a strong investment over the long haul despite the occasional boom and bust cycle can benefit from buying shares in a real estate exchange traded fund. These funds invest in the real estate market by buying shares in real estate investment trusts that own properties. As property values increase and rents rise, the real estate ETF investor can see growth over a period of decades.
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