Investing in Your 20s: A Guide
Investing in your 20s is investing in your financial future. Here’s what new investors need to know to lay the foundation for success.
People outside their 20s often talk about that decade as if it’s a time to be footloose and fancy free. But between rent, insurance, job struggles, and more debt than any generation in history, today’s twenty-somethings approach this time of their lives differently than their parents and grandparents.
For one thing, Millennials are better savers than previous generations, perhaps because they came of age in unusually tumultuous economic times. They understand that while you can’t predict where the economy will turn, smart financial decisions can help insulate you when the economy takes a nosedive.
Here’s why you need to start investing in your 20s and the right way to go about it.
Why Start Investing in Your 20s?
Your 20s is the one time in genuine adulthood when you’re furthest from retirement. Assuming you retire at 67 (like most Americans hope to) that’s 47 years away from your 20th birthday.
That means there’s no time like the present to get invested.
The biggest advantage of investing in your 20s is compounding. Compounding is when an asset’s earnings (capital gains or interest) are reinvested to generate additional earnings. This is how investing grows your money faster than saving.
For example, let’s say you invest $100 with an annual 3% interest rate. At the end of the year, assuming you don’t touch the account, you’ll have $103—the original $100 plus $3 in interest. But at the end of the second year, assuming you don’t touch the account, you’ll have $106.09, which is 3% interest on the original $100 plus interest on the $3 you earned last year. Basically, the larger the account gets, the more returns you see on it.
That’s the magic of compounding. And the longer you invest, the more you can take advantage of compounding.
Beginner’s Guide to Investing in Your 20s
Knowing you should invest and knowing how to do it are two different things. The good news is that starting early gives you more time to learn the ropes and you have more access to learning resources than ever before.
Everyone’s situation and strategy looks a little different—it depends a lot on your available resources, risk tolerance, and personal preference. Here are some strategies every investor should keep in their back pocket.
Get Comfortable with Risk
Everyone’s risk tolerance is different, but in your 20s, you have more time to recover losses than at any point in your life. You also have fewer financial commitments (like kids or a house). Which means that in your 20s, it’s time to get comfortable with risk.
Keep in mind that this looks different for everyone. Between your comfort zone and your available resources, you may be limited in the risks you can take. However, your 20s are the time to get as risky as you can stomach—this will deliver the best gains if it works, and if it doesn’t, you’ll have plenty of time to recover.
Use Index Funds or ETFs to Keep It Simple
For those who don’t know much about investing (most of us at 20, let’s be honest), your best bet is to rely on tools that make your life easier. The simpler it is, the more likely you are to use it.
That’s why we’re big fans of index funds and ETFs for 20-something investors—they’re easy to use, easy to start, and highly effective.
Picture a regular stock. Your aim with that one stock is to beat the market by selling when the stock is worth the most. Unfortunately, unless you’re psychic, this is hard to do, and even professionals often make the wrong estimations.
Index funds don’t try to beat the market—they try to be the market (or at least, a segment of the market). An index fund is a type of mutual fund or exchange-traded fund whose holdings track or match a particular market index. The S&P 500 Index, for example, tracks the 500 largest publicly traded companies in the U.S. When you buy into an index fund, you buy a share in every company in the index. This makes index funds a great way to achieve rapid diversification, and while stocks tend to rise and fall, indexes tend to rise over time.
If you don’t know your exchange-traded fund from your elbow, meet your new best friend in investing. An exchange-traded fund, or ETF, is a basket of securities that trade on the stock market just like an individual stock, but unlike a stock, an ETF tracks an index, sector, commodity, or asset. They’re available on most major investment platforms with commission-free trading (no fees, hooray), and if you do your homework on the best ETFs, you can get a low-cost diversification tool with solid performance over time.
Diversify, Diversify, Diversify
Finally, if you haven’t caught on yet, you need to diversify your portfolio. In other words, don’t invest in just one thing—if that one thing fails, your whole portfolio fails with it.
There are plenty of ways to diversify your portfolio. But for those who want to counterbalance the stock majority elsewhere in their portfolios, it’s a good idea to look for hedges, particularly those that have limited correlation to the stock market. We’re talking primarily about alternative investments.
Plus, your age means you have lots of freedom to try different things, invest in what you love, and still find smart ways to grow your money.
For example, Millennials are keen art investors and more likely to see art as a financial asset than any previous generation. Plus, they have far better access to the art market than their parents and grandparents thanks to online engagement. They were buying art online even before the pandemic, and thanks to the pandemic, the art world migrated to the digital world to accommodate safety measures.
It’s not surprising that Millennials have discovered art investing—it’s a profitable investment. After all, blue-chip art has outperformed the S&P 500 by 180% from 2000 to 2018. And thanks to the advent of crowdfunding and digital platforms, the blue-chip art world is now more accessible to regular investors than ever.
In other words, don’t be afraid to invest in what you love! Alternative investments like art should still make up a minority of your portfolio, but even as a minority, they can go a long way in hedging against stock market volatility while creating long-term gains.
Fine Art Investing for Investors of Every Age
Investing in your 20s is all about learning the ropes, taking strategic risks, and laying the foundation for your financial future. And for those who are new to investing (all of us in our 20s, let’s be honest) the best thing you can do is find the right tools.
Here at Masterworks, we’re on a mission to democratize blue-chip art investing. We serve as your art world expert partner, making it possible for ordinary investors to purchase shares in authenticated multi-million-dollar artwork (with help from our industry-leading research team in collaboration with CitiBank and Bank of America, identifying high-growth artist markets with the best potential risk-adjusted returns). All you have to do is buy shares and collect your gains when we sell. Let’s invest for your future. Fill out your membership application today to learn more.