Investing in your twenties – A guide for young adults

There are an estimated over 7 million people aged 20 to 29 living in the UK, and if you are in your twenties then it is important that you start investing early.

Investment has to do with buying assets with the intention of holding and reaping the benefits later in the future.

Investors typically hold an asset for more than one year. Assets take time to grow hence investing in your twenties will give your assets the time needed to appreciate in value and also give you enough time to recover from any loss you may record with the investment during any market downturn.

We will discuss why you should invest early with tips on how to go about investing, highlight some of the right investments and point out some risky investment areas you should avoid.

Tip One- Build an emergency fund

Investing is for the long term so you don’t want to go liquidating your assets whenever there is an urgent need for cash. Selling your assets will incur charges and buying them again will also incur charges so this is not cost effective in the long run.

It is advisable to pay off your debts such as student loans, mortgage etc. before starting your emergency fund. This will ensure you don’t keep going back to touch your savings whenever there’s a need for loan repayments.

As an investor you should keep cash available in a savings account where you can get easy access to it in an emergency and also earn interest on the money saved.

You could also buy short-term debt instruments like a fixed period Savings account, which involves leaving money with a bank untouched for a short period and upon maturity, the principal is refunded and interest is also paid to you at a predetermined rate.

Tip Two- Understand the markets & participants

As an investor, you are investing in the regulated capital markets which are under strict regulation by the watchdog called the Financial Conduct Authority (FCA). They license and authorize all market participants such as Exchanges, fund managers, Stock brokers, etc.

The London stock exchange is where stocks are bought and sold in the UK and the opening time is from 8:00 to 16:30 every Monday to Friday. They are closed during weekends.

You cannot visit the London stock exchange to buy shares or for advice. To do that you need to get in touch with your FCA licensed stock broker or licensed advisor.

You should check that your broker is licensed by the FCA by searching on FCA’s Financial Services register to avoid patronizing scam brokers. The FCA website has a list of authorized brokers for ease of verification.

Don’t fall for any unregulated get-rich quick scheme. Learning about the markets will help you avoid any unregulated schemes.

Tip Three- Have a financial plan

Every investor has a reason for investing. It could be retirement, buying a home, etc. you need to be clear on why you are investing because this will help you put together an investment portfolio that gets you to your goals in good time and with less charges and fees.

You could seek professional help to help you determine your risk appetite, and craft an investment portfolio that reflects that appetite.

At a young age, you can take more risks so you can put some of your capital in Savings account & the rest in higher risk markets like stocks. Equities tend to perform well in the long term, although with this portfolio, you risk losing a percentage of your capital in a down market.

 

Tip Four - Analyze and buy what you understand

As an investor, when you buy a company’s stock you do not only intend to keep it for life; you also become a part owner of that company. Even when the stock price falls, investors seldom sell as they wait for the price to improve. They only sell when it’s very necessary to realign their portfolio.

Before buying a stock, it is important to study the company’s financial health by looking at its balance sheets, income statement and cash flow statement. This will help you decide if the company is well managed and if its assets are enough to cover its liabilities and equity.

Your stock broker should provide you with an online platform or App that offers tools for analysis of company stock. This enables an investor to carry out a side-by-side comparison of stocks using several criteria before deciding on the one to invest in.

Buying stocks have risks but for young people you have time on your side to watch the stock grow in value and recover from any loss that may occur due to unforeseen circumstances & market downturn.

A stock bought in a good company for a small price today may become the next big thing tomorrow and there is no limit to how big a company can grow.

During a high-risk environment, you should only stick to Blue-Chip Stocks or other risk-free debt instruments, that can sustain the market downturn without affecting your capital.

Tip Five - Avoid Risky financial products

Investment is risky in itself; however, some products carry much higher risk than others. An investor in his twenties doesn’t need to take on too much risk since he still has time to nurture his investments.

Safe Forex Brokers advises that investors should avoid any complex products & instruments that they don’t understand. Avoid trading any derivatives or leveraged instruments. Complex instruments like Forex, CFDs, spread betting etc. are only suitable for professional traders & most of the retail traders lose.

So, it is really important to not put your money in complex instruments, especially if you don’t understand their risks & how they work.

High risk financial products are best left to professional investors & traders. Let us discuss some of them below.

  • Forex Trading – With Forex Trading, traders essentially speculate in the currency markets. They speculate on the movements of currencies like EUR/USD, GBP/USD, EUR/GBP & others using leverage or margin money.

  • Contract for Difference (CFD) - A CFD is a contract between two parties (usually a broker and a client) to exchange the price difference on an asset without actually taking delivery of it. Example if an asset price is speculated to increase, a client buys CFDs using funds borrowed from the broker in anticipation of an increase. He or She borrows funds to increase his capital but at the same time he is increasing his risk of losing if his speculation is wrong.

  • Spread betting - In spread betting when an asset price is speculated to change, an amount of money is bet on each point of upward or downward price movement. Spread bets also use borrowed funds to increase buying power and spread bets have expiry dates while CFDs do not. The use of borrowed funds makes it risky as if the speculation is wrong the losses could be huge.

  • Options - This is a contract between two people that gives the holder the right but not the obligation to buy or sell an asset at a given date and price. The holder pays a premium to buy the option contract. It is used to profit from price fluctuations of an asset. If the holder thinks an asset price will increase in the future, he buys a call option contract but if he or she is wrong and the price drops or does not move to the strike price, then the option is not exercised and the buyer forfeits the premium paid.

  • Future contracts - This contract gives the holder the right to buy or sell an asset at a given price and given future date. Upon maturity the holder must buy or sell even if he has to do so at a loss. This makes it risky.

All the above products are complex instruments that are generally traded using leverage. New investors should avoid these instruments as these are very risky, and only meant of speculation. Some of these instruments like Options are used for hedging, but all the complex instruments should be avoided if you don’t understand the risks.

Tip Six - Invest in ETFs

ETFs or Exchange Traded Funds, track a particular benchmark index, bonds, currency, commodity or sector. Hence we have ETFs like Bond ETFs, Currency ETFs, Gold ETFs, etc.

For example the Financial Times Stock Exchange 100 index (FTSE100) is an index that tracks shares of the 100 biggest companies listed on the London Stock Exchange. An ETF can be designed to replicate the performance of the FTSE100.

If you do not have the time to analyze each individual stock as we advised in tip three above, ETFs can come in handy since the stock exchange has done the analysis already.

By buying shares of an ETF, you essentially buy shares of all the companies in the index that ETF is tracking.

If you buy shares of an ETF that tracks the FTSE 100, it means you have a portfolio that is composed of shares in the 100 companies being tracked by the FTSE index. This means that if the index is up your asset value has more value and vice versa.

After buying an ETF, the fund manager manages the investment at a fee so you don’t need to do anything. Index ETFs are good for passive investors & they diversify your investment and reduce the chances of you putting all your eggs in one basket.

ETF shares are traded on the stock exchange much like ordinary shares with prices fluctuating based on demand and supply and other factors.  In the case of Index ETFs, the price is calculated after the market closes in the stock exchange every day and is called the Net Asset value (NAV) which is the value of each share of the index fund.

Also, check the total expense ratio & other fees involved like for exit, to ensure that you are not paying too much compared to other investments.

Final notes

As a young investor you do not need to engage in high-risk investments that you don’t fully understand. Have an equity-based portfolio, and buy stocks of good companies and watch them grow.

You could also buy Index ETFs that track a specific index or other ETFs that invest in mixed portfolio of low-risk debt & equity portfolio.

For passive young investors, investing in ETFs after full research in the costs & the fund's portfolio is a good option. ETFs that invest in stocks would expose your risk to different company stocks and are managed by an active fund manager on your behalf. This can help spread your risk so you don’t end up putting all your eggs in one basket.

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