Smart Investments for Young Adults

October 12, 2021

Not sure where to get started with investing? Here’s a look at smart investments for young adults, regardless of your unique investment style.

Just received your diploma? About to receive your diploma? Congratulations—you’ve made a big investment in yourself.

Now, it’s time to invest in your future.

The golden rules of investing are to start young and play the long game. But it helps to know how to get started in the bewildering forest of investment options. Here are some smart investments for young adults to keep in mind.

Why Invest While You’re Young?

Pretty much every investment expert out there will tell you the same thing: you need to start investing early.

That’s because despite the Hollywood portrayal of investing as fast-paced professional gambling, investing is actually a marathon. You do it over the course of decades, with the intention of compiling small gains over time.

This is because there are two critical benefits to investing early.

The first is compounding interest, which is interest you earn on the initial principal plus accumulated interest. Basically, it’s interest you earn on interest, and it adds up over time. For example, let’s say you save $5,000 per year from age 25 to age 35 with 7% interest. Assuming no losses, that would give you $602,070 by the time you retire without saving another cent after age 35.

The second benefit is outpacing the inflation rate. Inflation is the decrease in purchasing power of money, calculated as a percentage based on the average price increase of a basket of goods and services in the economy. It might not seem like a big deal for a price to rise a few cents each year until you see the effect compound. Take homes, for example. In 1940, the median home value was $2,938 (or $30,600 adjusted for inflation in the year 2000). In 2019, the median home price for first-time home buyers rang in at $215,000.

If that sounds depressing, take it as a lesson: this is why compounding interest is so important. Thanks to compounding interest, smart investing gives you a fighting chance against inflation, especially in retirement when the cost of living is far higher than it was decades ago.

Smart Investments for Young Adults

Ready to start investing? It’s easy to get overwhelmed—there are a lot of options out there, and while plenty of them are strong options, not all of them are the right fit for your unique case. Here are a few smart investments for young adults regardless of their situation or investment style.

Kickstart Your Retirement Plan—Any Retirement Plan

The golden years are not as far away as you think—especially if you hope to own a home, get married, have kids, send those kids to college, travel, or generally do anything that doesn’t involve socking away every red cent you’ve ever earned. So if you’re in your twenties, now is the time to kickstart your retirement plan. Any retirement plan will do—just make sure you have one.

Most people have an employer-sponsored 401(k) plan, as this is the most popular corporate retirement plan. These plans are super easy to use, since you can automatically contribute a portion of your paycheck to the plan each month with employer matching contributions. If your employer offers this, sign up, contribute as much as you can afford, and take your employer up on those matching contributions.

If you don’t have a 401(k) plan, an individual retirement account (IRA) is your new BFF. Even if you have a 401(k), you should open an IRA. You’re allowed to hold both, and an IRA gives you more freedom to choose your investments and maximize your tax-advantaged savings from a different angle.

Index Funds

Stocks are the mainstay of your investment portfolio, but there’s more to investing than just owning stocks. The reality is that the stock market is complex, and it can be hard to know what to buy. It’s even harder to diversify if you’re buying stocks individually.

The good news is that you don’t necessarily need to buy stocks individually—if you invest in index funds, that is.

Index funds are mutual funds or exchange-traded funds (ETFs) that seek to track the returns of a market index. In the U.S., some of the most popular index funds include:

  • S&P 500, consisting of the 500 largest publicly traded companies in the U.S.
  • Dow Jones Industrial Average, made of 30 large-cap companies
  • NASDAQ Composite, made of 3,000 stocks tracked on the NASDAQ exchange
  • MSCI EAFE, consisting of stocks from Europe, Australasia, and the Far East
  • Bloomberg Barclays US Aggregate Bond Index, which tracks the bonds market

Several major investment firms, including Fidelity, Schwab, and Vanguard all offer high-performing index funds. The key benefit of an index fund is that you invest in every company in the index, which means automatic diversification.

Use a Robo-Advisor

For those who are bad about investing or have to talk themselves into socking away a spare dollar, now is the time to get started with a robo-advisor.

Robo-advisors vary based on the platform offering them, but broadly speaking, they’re algorithm-driven, automated investment platforms that handle investing for you. That way, you don’t need to make decisions about when to buy and sell (or what to buy and sell, for that matter). Some of them even invest your spare change from every purchase you make.

Invest in What You Love

Last but not least, invest in what you love! There are plenty of opportunities to invest in things that excite you, and many of them offer excellent diversification in the process.

Alternative investments like art are a great example of this. Millennial investors are among the most eager art investors on the market right now, and they’re actually changing the art world in the process—driving digital sales and online engagement, as well as influencing tastes.

Ready to Start Working Toward Your Financial Future?

Ready to invest in your financial future?

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Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.