Investing in Your 20s & 30s For Dummies

Eric Tyson

• Publisher: For Dummies
• Year: 2021
• ISBN:
  9781119805427
• Edition: 3
• Topic: Personal Development
• Subtopic: Personal Finance

Take advantage of the decades ahead and invest in your financial future today

You may be at the stage of your life where you'restillwatching every penny, butyou knowthe earlier you invest, the more time your moneyhas towork for you. Investing in Your 20s and 30s For Dummies provides novice investors with time-tested advice, along with strategies that reflect today's market conditions. You'll getno-nonsenseguidanceon how to invest in stocks, bonds, funds, and even real estate—complete with definitions of all the must-know lingo. You'll also learn about the latest investmenttrends, including usingrobo-advisors to manage your portfolio, relying on apps to makefasttrades, andputting your hard-earned cash in digital currencies.Armed with the knowledge and strategies in this book, you caninvest wisely, monitor your progress, andavoidrisking too much.Today's investing landscape is changingat record speed, and this book helps you keep up.Find information onthe latest tax laws, financiallessons learned from the COVID-19 pandemic, and popular fundsfor the 2020s.

• Learn the investment basicsyou need to get started
• Discover new tools and technologies that make it easier than ever to participate in the market
• Build a diverse portfolio that reflects your values, financial goals, and risk tolerance
• Feel more confident as you fund an investment account, choose equities or funds, andplan for the future
• Make an impact with your money by selecting socially responsible investments
• Figure out how muchmoneyto investin employer-sponsored accountsor otherretirement plans

If you're a little unsure about stepping into the world of investing, Investing in Your 20s and 30s For Dummies gives you the confidence you need to establish a smart investment strategy.Grab your copy today.

Part 1

Getting Started with Investing

IN THIS PART …

• Define commonly used investing jargon, including explaining the different types of investments.
• Use investments to accomplish your goals, such as making larger purchases, buying a home, and investing for retirement.
• Understand expected investment returns and risks.
• See how investment returns are taxed and what you can legally do to minimize your taxes on your investments.

Chapter 1

Making Sense of Your Investing Options

IN THIS CHAPTER

Comparing common investments

Explaining investment terminology — risks and returns

Looking at the best investment companies and the rest

Deciphering the gobbledygook of professionals and credentials

So many subject areas and disciplines are packed full of jargon. Some of this is the result of “progress” and advances, and some of it is caused by workers in the field not going out of their way to explain and define things.

In this chapter, I give you the lay of the land regarding the enormous numbers of investment choices and foreign-sounding terminology that await you in the world of investing. I also explain the types of companies that offer investments and their strengths and weaknesses. And should you want to hire some investing help, I detail the various professionals pitching their services to you and the common credentials they hawk to convince you of their expertise.

Growing Your Money in Ownership Investments

The most exciting thing about investing during your younger adult years is that you can be more aggressive with money that you’ve earmarked to help you accomplish long-term goals. To achieve typical longer-term financial goals, such as being financially independent (also known as retiring), the money that you save and invest generally needs to grow at a rate much faster than the rate of inflation. If you put your money in a bank account that pays little or no interest, for example, you’re more likely to fall short of your goals.

Ownership investments are investments like stocks, where you own a piece of a company, real estate, or a small business that has the capability to generate revenue and profits. Over the long term, consider ownership investments if you want your money to grow much faster than the rate of inflation and don’t mind more volatility in your investments’ values.

The downside to such investments is that they can fall more significantly in value than non-ownership investments (for example, bank accounts, bonds, and so on), especially in the short term. So don’t put money into ownership investments that you may need to tap in the short term for rent money or your next vacation. To reduce the risk of ownership investments, diversify — that is, hold different types of ownership investments that don’t move in tandem.

I highlight three major ownership investments in the following sections: stocks, real estate, and small business.

Sharing in corporate growth and profits: Stocks

If you want the potential to share in the growth and profits of companies, you can gain it through buying shares of their stock. Stocks are shares of ownership in a company. You can buy stock directly in individual companies through a brokerage account, or you can buy a collection of stocks via a mutual fund or exchange-traded fund (see Chapter 10).

If you’ve followed the financial markets at all over some time or have friends or family who have spoken to you about this, you may have heard of companies/stocks like Amazon, Apple, Chipotle, McDonald’s, Microsoft, Netflix, Ross Stores, Tesla, Ulta Beauty, and so on. Those who bought and held stocks like these made big returns over the past decade. Remember, though, that we’re saying and seeing this now with the benefit of hindsight — looking in the rearview mirror. And, I’m sure you know that the future will be different than the past, so running out and buying these stocks now is far less likely to make you a mint going forward.

Now, what if I told you I've invested in and made good money in all of these stocks over the past decade? The fact is I have, but I never personally chose any of these particular stocks. I’ve owned these stocks and numerous other good companies and their stocks through mutual funds I’ve invested in. Of course, it’s impossible for any fund manager to only have a portfolio of the best winners or winners in general. Some of their stock picks will be mediocre and others worse.

You don’t need to be a business genius to make money in stocks. Stocks in the United States, for example, have returned an average of 9 percent per year over the past two-plus centuries. That may not sound like a high return but at that rate of return, your money will double every eight years! Simply make regular and systematic investments, and invest in proven companies and funds while minimizing your investment expenses and taxes. Of course, there’s no guarantee that every stock or stock fund that you buy will increase in value. In Chapter 8, I explain proven and time-tested methods for making money in stocks.

Profiting from real estate

You don’t need to be a big shot to make money investing in real estate. Owning and managing real estate is like running a small business: You need to satisfy customers (tenants), manage your costs, keep an eye on the competition, and so on. Some methods of real estate investing require more time than others, but many are proven ways to build wealth. Historically, investment real estate has produced annual returns comparable to investing in stocks.

Among the key attributes of private real estate investment are the following:

• You build wealth through your rental income exceeding your expenses and through property-value appreciation.
• You can leverage your investment by borrowing money.
• You must be comfortable dealing with property management, which includes finding and retaining tenants and keeping up (and possibly improving) your property.

This last point is super important. Buying and managing investment real estate is time intensive. Those whom I’ve seen succeed investing in real estate actually enjoy the challenge and work involved. And, over time, you can hire people to help you with managing properties if you don’t want to spend so much time personally at it.

See Chapter 12 for the details on investing in real estate.

Succeeding in small business

I know people who have hit investing home runs by owning or buying businesses. Most people work full-time at running their businesses, increasing their chances of doing something big financially with them. Investing in the stock market, by contrast, tends to be more part-time in nature.

In addition to the financial rewards, however, small-business owners can enjoy seeing the impact of their work and knowing that it makes a difference. I can speak from firsthand experience (as can other small-business owners) in saying that emotionally and financially, entrepreneurship is a roller coaster.

Besides starting your own company, you can share in the economic rewards of the entrepreneurial world through buying an existing business or investing in someone else’s budding enterprise. See Chapter 14 for more details.

Making “riskier” choices: Options, cryptocurrencies, and so on

I know from my many interactions with younger adults these days that there are some more exciting and enticing vehicles such as call options and cryptocurrencies. It’s easy to get drawn into such things when you hear a story or two about someone hitting it big.

I’m certainly open to you taking sensible risks, and the fact of the matter is that the highest returning investment vehicles I discuss in this book do indeed carry notable risks. But options and cryptocurrencies carry enormous risks and actually far less upside than what many people believe or realize.

Rest assured that at relevant places in this book, I cover these other types of vehicles (especially in Chapter 15), but please know that these are generally vehicles you should stay away from.

Keeping Money in Lending Investments

In the first section of this chapter, “Growing Your Money in Ownership Investments,” I outline how you can make your dough grow much faster than the cost of living by using stocks, real estate, and small business. However, you may want or need to play it safer when investing money for shorter-term purposes, so you should then consider lending investments. Many people use such investments through local banks, such as in a checking account, savings account, or certificate of deposit. In all these cases with a bank, you’re lending your money to the bank.

Another lending investment is bonds. When you purchase a bond that has been issued by the government or a company, you agree to lend your money for a predetermined period of time and receive a particular rate of interest. A corporate bond may pay you 4 percent interest annually over the next ten years, for example.

An investor’s return from lending investments is typically limited to the original investment plus interest payments. If you lend your money to a company through one of its bonds that matures in, say, five years, and the firm doub...