You’re never too young to invest.
Yes, investing can seem intimidating, and yes, there are experts out there who seem to speak a whole different language, but not everyone needs to make a career out of it. Most of us are just in it to bulk up our savings for retirement, make a little extra money on the side, or even just beat inflation (more on that in a minute).
Below, find 25 investing basics that every 25-year-old should know. Is this everything there is to learn? Of course not. But it’s a solid start.
About the concept
Your savings account isn’t invested in anything … You do earn interest on money in savings, but it’s usually less than 1%, and that money sits in the bank.
… but your retirement savings are. Retirement savings, on the other hand, are invested if you put them in a retirement fund like an IRA or 401(k). This isn’t the case if you simply name your savings account “retirement.”
Investments are one of the only ways to keep up with inflation. Inflation lops an average 3.87% off your money’s value every year, so you need your money to grow fast enough to outpace inflation. For most people, investing is the only way to get that kind of growth.
Investing is always a risk. Investing could earn you money or lose it. Just because many people invest doesn’t mean it isn’t a risk, and just because it’s a risk doesn’t mean you shouldn’t invest. Hardly anyone gets rich — or even just secure in retirement — by always playing it safe.
About the jargon
A security is a financial instrument. You’ll probably hear people refer to “securities,” which is a catch-all term for things like stocks, bonds, or CDs. Securities are divided into debt securities (money owed to us, like from a government bond), and equity securities (actual value we own, like stocks).
Stocks are equity in a company. When you buy a stock, you’re buying a tiny little piece of an actual company. Not a lot, but ownership nonetheless. Stocks are more volatile than bonds, and may therefore yield greater rewards or losses.
The stock market lets you track stock performance. Stocks are traded on “exchanges,” which make up the overall market. The major stock exchanges in the US include the New York Stock Exchange (NYSE), the Nasdaq, Standard and Poor’s 500 (S&P 500), and the Dow Jones Industrial Average (DJIA). While you’ll want to check in with your individual investments, monitoring stock market activity can give you an idea of how your portfolio might be performing.
Bonds are loans you make. When you purchase a bond, you’re essentially loaning a little money to an entity — like the US government, for instance — and that entity has to pay you back after a fixed period of time, with interest. There aren’t bond exchanges that show up in a ticker, because bonds are traded differently than stocks. However, there are sites where you can get an idea of bond pricing, like the Wall Street Journal.
Diversification means spreading your money out among different kinds of investments. There are a lot of opinions out there about how diversified an investment portfolio needs to be, but most everyone agrees that putting all of your financial eggs in one basket is a recipe for disaster.
The ROI is how much money you make on your investments. To get an idea of how well your investments are performing, you can calculate the ROI by dividing an investment’s gains by its costs.
About the process
You’ll probably be charged fees. Investing isn’t free. If you’re working with an investment professional, you’ll pay them either a percentage of your portfolio or a flat fee (you’ll want to know if your advisor is “fee-based” or “fee-only” before you sign on), online investment platforms o
r “robo-advisors” each have their own fee structures, and some mutual funds and ETFs also charge fees. These fees vary, and if you do your research, you can minimize them.
You don’t have to pick stock by stock. Professionals collect groups of securities called mutual funds, and you can invest in these funds to diversify your money without picking every individual stock or bond yourself. Index funds are mutual funds chosen to reflect a specific market, such as the S&P 500.
You may have to pay taxes due to your investments … The US government doesn’t let you have the money you may make investing for free. When you cash in, you’ll owe what’s called capital gains taxes.
… but you also may receive a tax break. Although different retirement accounts have different tax structures, contributions are often tax-deductible. 529 savings plans, which are also investment accounts, are similarly tax-advantaged.
Sometimes, you’ll fail. It’s an unfortunate truth that we won’t all be rock star investors. For some people to do really well, others must do poorly. And sometimes, you’re the “other.”
Starting early is a major advantage. In your 20s, your biggest asset is time. Even when you’re just investing in retirement savings, nothing can make up for the effect of compound interest. Also, if you lose money in the market, you’ll have more time to make it back before you need it.
Hot stocks probably aren’t your ticket. There’s always a stock to buzz about, but that doesn’t guarantee it will be your ticket to wealth. It’s a better bet to research the company and make your own decision than to blindly jump on the stock of the moment.
Your long-term strategy has nothing to do with that morning’s news. Most investors shouldn’t “buy” or “sell” every time it’s recommended on TV. There’s an entire documentary explaining why active investing — buying and selling stocks strategically and often — doesn’t work for most people.
Getting too attached to individual stocks can be dangerous. If you own a particular security you’re attached to for sentimental reasons or because of its past performance, you might be reluctant to ditch it even if your advisor or investment professional says to. Securities are only as good as how they’re performing currently, and you have to be willing to let low performers go.
You don’t need to check constantly. If you’ve caught sight of a stock ticker (on Business Insider, for example), you’re probably aware that markets go up and down every day, and so do individual stocks. If you’re investing for the long term and aren’t an investing professional, you don’t need the anxiety of a running ticker on your desktop.
Don’t invest money you’ll need soon. If you’ll need quick access to liquid cash in the short term, you won’t want to park that money in the stock market. Some professionals say you shouldn’t invest money you’ll need in the next five years, because if the market goes down, you won’t have enough time to recoup those funds.
About keeping a cool head
No one can reliably predict the market. They just can’t. While professionals can make educated guesses, predicting the market is predicting the future, and no one can do it.
And past market behaviour isn’t a reliable way to predict the future. On that same note, looking at what the markets have done isn’t a reliable way to predict what they will do. Again, this is a case of predicting the future, which could go in an unexpected direction due to unforeseen events known as “black swans.”
You don’t know what you don’t know. There’s a lot to learn about the stock market, and it’s a big mistake to think that you’re an expert just because you’re a generally smart, capable person. There’s always more to learn.