How to Invest in Your 20s

Friday, October 18, 2019 8:00 AM | Michael Fowlkes

The first rule any investor should learn when getting started is that investing is a long-term game. It is a marathon, not a race, and the sooner you start investing the better the end result will be.

Another rule is that you can start with any amount of money. A lot of people in their 20's believe they do not have enough extra income to start investing with… this is not the case. In the past trading fees and commissions made it difficult to invest small amounts of money, but in today's work with commission-free trading you can easily put as little as $100 to work in the market. If done consistently, over time the money grows and as your income increases you can increase your investing budget. If your brokerage account has not moved to zero commissions, you may want to consider a change. There are a lot of great brokers with extensive research and training tools that you can consider where all your trading is free. For smaller investments, this can make a huge difference in your returns.

Compounded interest is an investors best friend. The idea is that over time you earn interest on interest. This applies to dividends as well if you utilize a dividend reinvestment program. Each quarter your dividends go up fractional because each quarter you reinvest the dividend and you own a slightly larger amount of the underlying security. Over time this is where you really make your money.

Young investors should also be more risk tolerant. Young traders can more easily make back any losses since they have such a long career ahead of them. Conversely, losses taken by an investor in the late stages of his or her career are harder to recover. While risks should be taken, there is always a need for safer investments in a portfolio with the goal of long-term appreciation.

Traders in their 20's should take full advantage of any company 401k, especially if there is a match which is essentially free money and contribute as much as possible for the tax advantages. If a 401k is not possible, a ROTH IRA is another good option. While the money invested is after-tax in this scenario, withdrawals made in retirement are tax free so gains are tax free.

Keeping all this in mind, let's take a look a few good investments for a trader in their 20's.

Alphabet (GOOGL)

Alphabet (GOOGL), the parent company of search engine giant Google is a good investment for a trader in their 20's. The stock does have some inherent risk since technology can change so rapidly, but it also enjoys safety due to its market dominance and huge barriers of entry. Google is the undisputed king of search, and so far, only social media giant Facebook (FB) has managed to pose any real threat to its dominance in online advertising. Google does not pay a dividend, which is a downside to the stock, but can be overlooked in this case because of the company's strong market dominance and growth potential. The internet has become a vital part of day to day life, and while it may feel like the entire world is plugged in, the reality is that only around 53% of the global population is online. That number will continue to grow, and Google will be there to serve them. Tech trends change over time, but the internet search market is stable, and until a new search provider is able to overtake Google, Alphabet will grow. Traders in their 20s should also invest in companies they are familiar with and can connect with, and Google is exactly that.

Wal-Mart (WMT)

Retail giant Wal-Mart (WMT) falls more into the risk-averse portion of a portfolio. The retail sector is tricky as e-commerce has totally change the landscape, but Wal-Mart has proven to be agile and responsive to changing times and remains a very solid investment. As (AMZN) shattered the traditional brick-and-mortar business model and put a long list of retailers out of business, Wal-Mart also found itself in danger of succumbing to "showrooming" which is the term used for shoppers that research products in stores and then buy them cheaper online. Wal-Mart was quick to realize the danger Amazon posed and invested heavily in growing its e-commerce business. The investments have been working and Wal-Mart has shown strong online sales growth. Last quarter online sales were up 37% year over year, in-line with the growth in the previous quarter. Wal-Mart has the advantage of being the nation's largest grocer as well and is expanding its pick-up and delivery options to better compete with Amazon. As for its in-store business, Wal-Mart invested heavily in raising its minimum wage and upgrading stores while closing underperforming locations. This has improved both employee morale and customer satisfaction and last quarter same-store sales were up 2.8%. WMT is also a great long-term holding thanks to its dividend program. The stock is currently yielding 1.8%, and the company is a dividend aristocrat with a 44-year streak of dividend increases, making it perfect for a long-term holding with a dividend reinvestment program.

Carvana (CVNA)

Carvana (CVNA) falls into the riskier part of a portfolio mainly because the company is so young, and only went public in early 2017. The auto industry is tough because it is very cyclical, meaning it has high vulnerability to business cycles. Carvana has a lot of risk, but it is also attractive because of its approach to sales. Younger consumers are less into their cars than previous generations, but they do love technology, which Carvana certainly offers them. The new consumer is used to getting products on demand, and far less interested in dealing with salespeople and haggling over prices. Carvana allows you to buy your car online, and have the car delivered to your driveway or pick it up at one of the many vending locations around the nation. It makes the car buying process very simple, and it could easily become the future or car buying. Carvana is a product of the new tech-driven economy and being the first company to adopt this business plan gives it a clear edge over future competition. The risk is that all the other car companies will adopt a similar approach. Carvana is still growing, and in time that will lead to higher margins. Carvana is risky as it is a new company and a new idea, but its business plan definitely accommodates the current retail environment and could make Carvana the premier auto dealer in years to come.

Invesco QQQ Trust (QQQ)

Invesco QQQ Trust (QQQ) is a good investment for younger traders that can be gradually added to over the years. QQQ is an exchange-traded fund that tracks the performance of the NASDAQ index. Over time, the markets will rise. There will always be down markets and recessions, but the long-term will be positive. You can see how the NASDAQ has performed over the years with this chart. The NSADAQ is heavily tech weighted, making it a little riskier than the other big indexes, but technology fuels the world, and its importance will only continue to grow moving forward. Young investors do not need to allocate a huge portion of their portfolios to index funds and QQQ is a good pick because it has slightly higher risk and therefor reward. The key is to consistently add to the position over time, regardless of overall market conditions, which only works in your favor long-term lowers your average cost basis. QQQ is good because it is an investment that you can have that does not require a huge amount of homework after buying. You are not betting on any one particular stock, instead you are betting on the long-term upward trend of the overall market. QQQ also offers a modest 0.8% yield at its current price.

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