While you might be just starting out with your career in your 20s, some of you might already start thinking about longer-term wealth goals, such as wedding, preparing downpayment for your first home, or allowances to support elderly parents’ retirement.
How should you start thinking about getting started with investing in your 20s? Here are 4 tips when it comes to investing in your 20s, as a Gen Z, can embark on your journey with confidence.
Tip 1: Start early, start now!
With little capital, you might think it's pointless to start investing. After all, how much can a small amount really accrue to… right? However, while this is a common mindset, it is important to remember that wealth building is a steady process that occurs over a long-term horizon.
Even with a small amount of money, you still have the best asset that any investor can have: time. With a long runway ahead of you, the small sums you invest will eventually accrue to significant outcomes in the long run due to compound interest.
Let’s put this in perspective:
- Scenario A: At age 20, you invest $100 into an index fund every month for 30 years. Receiving an average return of 8% p.a.. Thanks to the power of compound interest, you will accumulate about $141,000 when you turn 50.
- Scenario B: Assume the same amount is invested monthly into an index fund, but only started investing only at age 30. As a result of this delay, you will have just around $57,000 when you turn 50.
This 10-year delay caused you close to 2.5x times the difference!
Just like a snowball rolling down a mountain, a longer pathway means a higher chance of accumulating more snow over time. The sooner you start investing, the more impactful compounding becomes, that’s why Albert Einstein famously called it the “8th wonder of the world”.
There are also intangible benefits in investing early. By starting early, whether you get positive or negative returns, you still get the chance to dip your toes in investing and learn to manage your emotions and learn from any mistakes you might have made in the future.
What then can I invest in, as a beginner with little money?
A good starting point for budding investors with limited capital would likely be a low-cost globally diversified portfolio. While index funds may not sound exciting at first mention, historical data has shown that buying such funds is actually one of the most successful investment approaches. Even investment titan Warren Buffett has personally endorsed index funds for wealth building.
"By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals." – Warren Buffett
Index funds are particularly attractive if you do not have large amounts of money as they are a low-cost route to diversification.
We have a suite of index funds for you to choose on our Fund Smart platform such as the Global Equity Index Fund and US Equity Index Fund offered by HSBC Asset Management.
For those looking for a simple way to build a low-cost diversified portfolio and have it managed by expertises, consider our Endowus Flagship Portfolios, with over 10,000 securities as underlying, the total expense ratio of the underlying funds ranges only from 0.21% to 0.35% p.a.. Flagship Portfolios are offer as Discretionary Portfolio Management (DPM), which is an investment management service on a framework guided by SFC regulations, where clients grant the DPM portfolio manager authority to make buy-and-sell decisions on their behalf.
Read more: Introduction Endowus Flagship Portfolios: a core strategy for your financial goals
Read more on why they can potentially be more tax efficient vehicles than US-listed ETFs for Hong Kong investors.
Tip 2: Have an emergency fund
Here’s a reality check: all investments carry risk. While it may be tempting to pour all your savings into the financial markets to accelerate the process of wealth building, there is the inherent risk of losing everything.
So then how much of your savings should you really invest?
The specific answer to this question depends on many factors: your income level, the current amount of savings, and whether you have built an emergency fund.
Having a reservoir of savings — generally equal to about 3 to 6 months of your monthly expenses — serves as a safety net to fall back on in the event of job loss, financial distress, or any unforeseen expenses.
Note that investments should only start after you have set up an emergency fund. Therefore, building a secure foundation with your emergency fund should be a top priority. Only then can you consider investing the remaining monetary inflows.
We can begin building your emergency fund from your internships, part-time jobs, or even a fraction of your pocket money. Depending on your liquidity requirement, you may consider building the emergency fund by simply put in saving account in a bank, doing monthly time deposits or , may consider parking these funds in low risk, liquid options such as money market funds.
Tip 3: Don't speculate on 1 or 2 single name stocks
The Retail Investor Study 2023 by the Hong Kong Investor and Financial Education Council showed that stocks are the most popular investment product for investors aged 19 to 28.
While it may be tempting to follow the crowd and dive straight into buying individual stocks, such as Nvidia, which has dominated headlines and surely conversations among drinks.
Those of us who are older remember, there was once a time China tech stocks such as Tencent and Alibaba were stock darlings in Hong Kong. But in recent years, these stocks have dramatically fallen in value due to a slowdown in the Chinese economy and changes in the regulatory environment on China's big techs since 2021.
More importantly, stock picking requires significant time and effort — analysing financial statements, tracking company development and stock prices, in-depth research into industry peers etc.
You might thus end up selecting stocks based on fads or home bias affiliation. But, historically, doing so has been an unreliable path to reaping resilient returns, and can lead to huge losses for concentrated investments.
Tip 4: Instead of DIY investing, get professional advice
We are rarely hands-on when it comes to other things in our lives. Think about it: we understand the value of hiring a professional plumber, when we've never installed the plumbing system ourselves. Similarly, why no seek out for professional help when it comes to investing?
While DIY investing gives you full control of your investments, it might not work in your favour as a new investor with little knowledge. There are now easy options to obtain help from professionals, such as online wealth advisory platform, Endowus at low, fair fees.
A trusted financial advisor can help shoulder the responsibilities of tracking your investments, and keeping up with the dynamic financial markets. As a result, more time can be spent on other important things in life, whether it’s learning a new skill or travelling to a new destination.
Learn more about our model portfolios, the Endowus Core and Satellite Portfolios.
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Investing can look daunting at times, but starting off on the right foot can greatly simplify the process.
Education is essential — equip yourself with the wide-range of resources available, and strive to make well-informed decisions.
Ultimately, remember that personal finance is, in essence, personal. Don’t let other people’s stories of their investment conquests easily influence what you choose to do. Because for every success story, there are many tragic ones.
Click here to get started with your Endowus journey in just a few minutes, or feel free to schedule a 1-on-1 free consultation with our licensed client advisors if you are in doubt.
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