Investing in your twenties is a great start for better financial security in the future. As a young student or an income earner with a long career ahead, you can afford to make some mistakes. Young investors should, however, learn from their mistakes. There are also certain slip-ups that can be avoided easily with some vigilance.
If you are a budding investor in your twenties, here is a list of the most important factors to include in your overall strategy so you make avoid making obvious mistakes:
Invest in What You Know, After Doing Research
As financial advisors say time and time again, invest only in assets that you can actually understand. Or as Warren Buffet calls it, invest within your “circle of competence.” You don’t have to be an expert on the subject—which you won’t be in your twenties—but you should be able to understand the sector.
Knowledge is crucial, so conduct background research on the companies and assets that you invest in. If you don’t know where you put your money, then you are vulnerable not only to extreme loss but also to fraud. Investing is not gambling. Don’t plan on winging it through the stock market or real estate. Start off with an informed strategy to rake in the profits later.
Be Aware of the Dangers Lurking in Up and Coming Sectors
Investing is often considered to be a profession where people look ahead. Most investors put their money on ideas that may bear lucrative fruits in the future. When such a mindset is prevalent in the market, it can be tempting for young investors to rush ahead and bet everything on “hip” sectors.
For example, consider cannabis. The decriminalization of this once illicit drug has taken over the news cycle. It’s legal to recreationally use cannabis in at least two states, and more states have bills tabled to decriminalize weed for good. These political developments have resulted in marijuana stocks skyrocketing in price. Doesn’t it all mean that cannabis is a great investment?
Not exactly. If you follow the news carefully, you would know that weed will not be legal anytime soon thanks to Jeff Sessions. Those sky-high marijuana stocks could be worthless in the immediate future if the Attorney General enforces federal law on states that have legalized marijuana.
That’s just one of the examples where a sector may seem promising, but only superficially. Therefore, be cautious when investing in sectors that seem to be on the rise. Careful scrutiny may present a different picture.
Don’t Buy Stocks in a Company Just Because You Think the CEO is Cool
Young investors should be extra careful before spending money on an asset or stock. That is to say, new investors absolutely must do their research instead of taking the news or a company at face value. It’s not uncommon to see young people investing in companies just because they think the CEO is cool.
When you buy stock from a company, you are investing in the company, not its boss. Don’t buy stock or bonds from companies with celebrity CEOs just because. Assess the value of the investment without letting your emotions get in the way.
Don’t be Obsessed with Diversification
Diversification is a common mantra heard around investment advice circles. Yes, you should diversify your portfolio. However, diversification is not a major priority when your investment portfolio is small.
Twenty-somethings should focus on balancing high-risk and low-risk investments rather than obsessingabout branching out into different sectors. You should have savings accounts and certificates of deposit in your portfolio in addition to riskier stock, for example. Diversifying for the sake of diversification may work against you in the end.
Young investors are highly likely to take on more risk than older, more experienced investors. It’s not necessarily a bad thing, as long as you know what you are doing. Pay attention to the above suggestions and stop yourself before you make a perfectly avoidable mistake.