It is a common belief that younger individuals should experiment with exposure to more risk — regarding their investments — because they have a longer time to make up for losses if need be. While this is technically true, it is likely still a good idea for younger investors to focus on the long-term and not “put all their eggs in one basket.” In fact, and to reference another popular expression, slow and steady generally wins the race in the investing world. That said, there is room for a risk happy-medium (especially while young) and with some due diligence, identifying which risks are right for you is completely achievable. Here are two things that a younger investor might want to consider throughout the process of determining what risks make sense for them:
Don’t Forget About Debt:
There are two extremely common types of debt that younger people incur. The first is credit card debt. The second is student loan debt. Often, when young individuals graduate from school and start having a steady stream of income, their first inclination is to invest their money into the stock market. That is the goal of becoming an investor after all, right? Technically, it is a major pillar of investing, but not the only one by any means. For instance, average annual percentage rates on credit cards are nearly 15%. Meanwhile, the average return for the stock market is roughly 7%. Therefore, if you took a specific amount of money and invested well, beating the market — let’s say a 12% year-end return — you would still be losing money because your debt cost would outweigh your gains — assuming you have significant credit card debt. Conversely, if you were to take the same amount of money and paid off your debt, you would be putting yourself in a much better economic position. Student loan debt is a little bit different since the rates are generally much lower (around 5%). Although, it still might be in your best interest to pay off as much of your debts as possible before investing.
Small-Cap Stocks Can Be Calculated Risks:
Since they generally provide a bigger upside potential than mid or large-cap stocks, it might be worth your while to explore small-cap options while you are young and have more time to earn back potential losses. Further, even though they might also come with higher levels of risk, there are ways to reduce the amount of risk you expose yourself to within this space. For example, not all industries are equally risky but effectively all of them have companies that are considered to be small-cap. As such, you could strategically target industries that you have determined to be stable — in order to mitigate risk — while also enabling yourself to potentially benefit from the giant amount of growth potential.
Consider Getting an Advisor:
Financial advisors come in many ways, shapes, and forms now because of recent technological advances. Some people decide that a formal ‘human advisor’ is the best option for them, while others opt for one of the ‘robo-advisor’ services that are now available — Boon Investments for example. Meanwhile, others are able to find an informal ‘advisor’ such as a relative, friend, or professor who can help them increase their knowledge of investment management. Keep in mind, though, that you should never solely rely on the opinion of a non-professional and always do your own due diligence. Nevertheless, talking or studying with somebody who is more experienced than you can help enhance your own learning process, while also making it more fun along the way. It likely would not hurt to consider a few options!
Ultimately, thinking about investing and saving for your future while you are still young is extremely important and will possibly set you apart from many of your peers. Still, it is wise to make informed decisions making sure to “look before you leap.” To recap, trying to pay off all debts — more specifically those with high interest rates — can help to improve your economic standing prior to investing, considering small-cap companies in relatively low-risk industries can improve your performance, and consider a financial advisor might lead to a more enjoyable learning process and clearer path to your end-game goals.