4 Basic Rules of Investing in Your 20s

Time Frame

Your time frame makes a world of difference. The same type of investment can be more risky or less risky because of your timeframe. For instance, if you’re investing for your retirement in 30 years, you can afford to invest in equities, which will give you high returns over a long period of time.

However, if you’re hoping to invest so that you can buy a big house in two years, that same investment in equity is more volatile. This is because equities have bigger swings (+/- 20%) in their valuations within a year as compared to bonds which have a smaller swing in a year (+/-3%).

So, investing in equities for the down payment of your dream house could result in losses after two years rather than a profit. With a longer time frame, however, the equities are going to ride through the years of volatility to reap larger returns over 30 years.

In other words, if you’re looking at a shorter time frame of two years, you’re better off investing in instruments with lower risks like bonds or fixed deposits. Of course the returns for these instruments are lower, especially if your initial capital isn’t high enough.

The phrase “high-risk, high returns” is sensible for longer time frames, and the opposite applies for shorter time frames.

So when you’re planning your investment, make sure you know how long you can keep your money invested. The longer you can keep your money invested, the better your returns.

Amount of capital

You know those movies where the main character loses all of their life savings in one day because of a wrong investment choice? It’s not just in the movies. It happens in real life too, and it comes from bad planning.

You should not put all your money in investments, and you should always set aside money for emergencies before using any excess for investments. This ensures that you don’t need to sell off your investments at a loss in a hurry.

Depending on the amount you have left to invest, you can find an option to suit that budget. You can invest with as little as $100/mth into unit trusts.

If you have more of a budget to invest with, you can look into stocks which have a minimum number of 100 shares, and it’s often recommended to look at stocks with a minimum $10,000.

But before you consider investing everything into one amazing company, it’s important that you read about the next point – diversifying.

Diversifying

Don’t put all your eggs in one basket. This advice is vital for your investment habits.

Putting all your investment into one company is risky, no matter how amazing that company is. Your money is safer when it’s invested across various instruments. Diversifying lowers the risk of losing all your investments at one go, and it ensures a more stable rate of return.

With $10,000, you could buy Apple’s stock and risk putting all your $10,000 on Apple’s future success. Or instead, you could buy unit trust or exchange-traded funds and have your money invested into 30 companies all at once.

Buying these diversified instruments spreads your risk and reduces the volatility that you experience.

Be Passive

Have an investment strategy that will make your money work for you.

Some people have their day job and are traders by night. They boast of high returns that beat the stock market through quick gains. But chances are, in the long run, their returns aren’t that impressive, and they spent many sleepless nights.

Trading, whether in equities or real estate, is a job itself. It requires hours of research, years of experience and a deep understanding of the markets.

So if your day job is tiresome enough, you may want to consider getting professionals to invest for you so you can rest easy at night.

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