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What investment advice can you give a young (26-year-old) professional who is looking to invest in something that will give both income and growth? Stocks and/or bonds? -- C.
A combination of
growth can be a worthwhile
investment strategy. But investing in your mid-twenties offers some unique challenges. Young professionals often lack the time or experience to thoroughly research and pick the "right"
assets. However, being in your twenties also offers you a lot of benefits that can make you money now and ensure that you're set to invest in the future. So let's take a look at twentysomething investing.
Yes, there are obstacles that can mar the road to building a strong
portfolio in your mid-twenties. While money might not be as tight now that you're a member of the workforce, it can be hard to prioritize and set aside that hard-earned cash to buy
bonds, when a new car might look tempting (the current U.S. saving rate is disconcerting evidence of that). Time is also probably a fairly limited resource at this point in your life. Most 20-somethings aren't yet
market mavens, so buying and selling like a "pro," can be pretty intimidating. Don't fear: While time and money might be in short supply, it honestly doesn't take a whole lot of either to get a solid footing for your
portfolio. The following are five things that you should keep in mind when you're building your portfolio.
1. Asset Allocation Rules
The way you choose to allocate your assets can have a significant impact on your portfolio's
gains, and since
asset allocation is largely age dependent, it's important to make it a conscious part of your investment decision-making process (see
"Allocate Your Assets Like a Pro").
If you're in your twenties, think stocks. Stocks offer young investors more of an upside than other investments (like bonds and
CDs) and they're frankly more exciting. According to
David Peltier, "In your 20s, there's little need to focus on bonds. Even if you suffer some
losses in stocks, you still have a few decades before
retirement to make up for it."
What about that
savings bond Grandma got you for your 12th birthday or that spare bit of
savings you were thinking of dropping into a CD? There's nothing wrong with having some assets tied up in investments that carry little
risk, but if you're holding onto some cash in your savings just for the
interest, you'll probably get a lot more utility out of it by investing in relatively stable stocks that will offer growth, income and some sense of "security" at the same time.
Peltier says, "
Large-cap stocks that pay
dividends will offer steady growth and income over the long term." The
S&P 500 Index
, for example, "has been postingdouble-digit
earnings growth over the past several years and also sports a 1.8%
If you find that you do have the time to
research individual stocks, Peltier suggests that you build a
diversified portfolio with some of the companies in the S&P 500 (see the S&P's
500 "component" names). Otherwise, if
fundamental stock homework is something that you simply don't have time for, Peltier says, "There are several
mutual funds (see
TheStreet.com Ratings Fund Screener
, under "Fund Style") and an
exchange-traded fund (the
"SPDR" 500 ETF
(To learn more about ETF investing, visit
TheStreet.com ETF Center
2. Invest in What You Know
When you're thinking about companies to invest in, it's easy to get overwhelmed by focusing on what you
know about investing. Why not hone what you
know -- your interests, hobbies, or profession -- to your investment decisions? If you're emotionally attached to your Mac or iPod, consider whether
would be a good play for your portfolio. Or if you can't live without a burrito from
, can their stock satiate your investing appetite?
Realistically, shopping decisions shouldn't be the sole basis for your investment portfolio, but remember that you're part of that coveted 18- to 30-year-old retail demographic. What 54-year-old investment analyst can say that?
Even if you don't hold an M.B.A. in finance, you can still use the
non-financial information you've got under your belt to pick winning stocks (see "How to Pick Winning Retail Stocks,
Part 1 and
Part 2" )
3. Make a Distinction between Tomorrow's Retirement and Today's 'Good Life'
If you're a young professional with a real job, you should have a real
retirement account that's separate from your
portfolio. Why? Because your personal investing goals (see
TheStreet.com's The Good Life Section
Small Business Stories
) shouldn't necessarily be the same as your
retirement goals. Also, retirement accounts like
IRAs subject you to regulations that limit your flexibility.
Yes, it's a great idea to take full advantage of the
tax benefits that a specialized retirement account, such as an IRA and a
401(k) offer you, but don't feel the need to relegate your investing activities to your scheduled contribution.
4. Figure Out What You Want in an Asset
Remember, you're allowed to pick objectives for your personal portfolio that are different from those of your retirement account. Maybe you're after growth. Maybe income's what you want. Maybe it's a combination of both.
Defining what kind of assets you're looking for
you go on your search will definitely help narrow the large number of offerings in front of you.
For example, with stocks, there's usually some tradeoff between growth,
value and income plays. It's pretty rare to find a stock that
returns double digits every year, pays out a king's ransom in dividends, and shows no signs of slowing down. If you're realistic in your goals, you'll have at least some guidance when it comes to deciding between things like
"blue chip" stocksor
emerging market investments.
5. Get Fluent in Investing (If You're Not Already)
Being fluent in investing goes beyond simply knowing the
lingo -- it's about understanding the cause-and-effect relationships between the movements you make in your portfolio and the changes those moves have on your portfolio's value.
Fluency in the investing world also involves investing like a professional -- really understanding the facts about companies and investment vehicles that you put your money into. In other words,
know what you own
Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.