If you're like most 30-year-olds, you're past the point where fun weekends take priority over buying furniture, but you might not be ready yet for the move to the suburbs. You're no longer an entry-level employee, but you're not quite considered management either.
This in-between time of your life is — or at least should be — evident within your investment portfolio too. You're able to start tucking away more meaningful sums of money in your retirement account, so the crazy flyers you took on hot story stocks are a thing of the past. Yet, your holdings don't quite look like grandma's as you know you've got time to ride out the market's rough patches and won't need any investment income for a long while.
With that as the backdrop, here's a closer look at three of the biggest investing tripwires 30-somethings should be sure to avoid.
1. Investing too little
You had to know it was coming somewhere on this list, but there's a reason it's first … because it's the most important misstep to avoid. This is the time in your life when it's crucial to sock away as much as you reasonably can, as this is the point when your portfolio enjoys some of its strongest momentum.
You've likely heard the term “compound interest” before. It just means you're earning new interest on previous interest payments, producing exponential growth. Although the idea is typically used in reference to interest-bearing accounts or bond portfolios, the idea applies to equity investments too. You don't just want to earn good returns on your cash contributions to your account, you also want to earn good returns on the returns you achieved on your prior investments.
Obviously the more you put in, the more you get out. You may not have to set aside a massive amount of your paycheck to build a nice nest egg though, even if you achieve average returns. Earning an average of 9% annually on an investment of just $500 per month will leave you with nearly $100,000 at the end of a 10-year stretch. Waiting another 10 years to start but then growing your portfolio for 20 years will still only leave you with something on the order of $320,000 at the end of that two-decade stretch. If you can do it for 30 straight years though, you'll end up with around $850,000 on only $180,000 worth of your own cash contributions.
The point is to start as soon as possible, even if you have to start small.
2. Taking on too much risk
It's tricky if not confusing.
As a younger investor, you're told to use the time you have until your retirement to your advantage by taking risks you can't afford to take when you're older. Time, you see, unwinds much of the downside volatility that riskier growth investments tend to bring to the table. For instance, Twitter may be up by more than 300% since early 2017 and back within sight of record highs, but as of early 2017, it was down more than 30% from its IPO (initial public offering) price and down over 60% from where the stock closed on its first day of trading three years prior. That would have been a scary three-year stretch for anyone making a big bet on Twitter right before retiring, even though the stock ultimately recovered for early investors.
There's been a curious shift in the way many investors view and embrace risk in recent years, however. Too many of them (often younger) are taking risks just for the sake of risk-taking without considering the likelihood of an actual payoff. As an example, the prospect of a 300% gain is enticing to be sure, but if there's only a 10% chance of earning that sort of payback while there's a 70% chance of losing everything, that's a risk best left avoided.
Examples of story-based failures include Blue Apron and Groupon. Both had scintillating backstories based on their consumer-friendly service, but too many investors looked past the fact that neither would ever be able to generate a sustained profit.
3. Failing to make a numbers-based roadmap
Finally, add the lack of a clear financial plan to the list of big mistakes younger investors can easily avoid but often don't.
The reasons for not hammering out such specifics are entirely understandable. Some investors are fearful a detailed look at their current savings and investment plans will make it clear they're off track. That's scary … so scary that some folks would just rather not know. Other investors may simply be too busy, thinking that establishing such a plan will require too much time.
Neither fear is actually merited though. A bunch of investment calculators are freely available on the web, allowing you to quickly test out several “what if” scenarios. You can get a rough idea of what kind of money you'd have to invest to reach your personal endzone in a matter of minutes — just be sure to read the Motley Fool's quick primer on everything to consider. And if you're looking for something more comprehensive such as a complete portfolio plan that evolves as you age, odds are good your brokerage firm or a certified financial planner can readily offer a lifetime-minded allocation plan.
Any plan is better than no plan at all — just start somewhere.
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