20 Things to Know About Investing by Age 25
Business Insider, October 2014
You're never too young to invest. Yes, investing can seem intimidating, and yes, there are experts out there who
seem to speak a whole different language, but not everyone needs to make a career out of it. Most of us are just
in it to bulk up our savings for retirement, make a little extra money on the side, or even just beat inflation.
Below, find 20 investing basics that every 25-year-old should know. Is this everything there is to learn? Of
course not. But it's a solid start.
1. Your savings account isn't invested in anything ... You do earn interest on money in savings, but it's
usually less than 1%, and that money sits in the bank.
2. ... but your retirement savings are. Retirement savings, on the other hand, are invested if you put them in
a retirement fund like an IRA or 401(k). This isn't the case if you simply name your savings account
"retirement."
3. Investments are one of the only ways to keep up with inflation. Inflation lops an average 3.87% off your
money's value every year, so you need your money to grow fast enough to outpace inflation. For most
people, investing is the only way to get that kind of growth.
4. Investing is always a risk. Investing could earn you money or lose it. Just because many people
invest doesn’t mean it is necessarily a safe bet.
5. A “security” is a financial instrument. You'll probably hear people refer to "securities," which is a catchall term for things like stocks, bonds, or CDs. Securities are divided into debt securities (money owed to us,
like from a government bond), and equity securities (actual value we own, like stocks).
6. Stocks are equity in a company. When you buy a stock, you're buying a tiny little piece of an actual
company. Not a lot, but ownership nonetheless. Stocks are more volatile (risky, unpredictable) than bonds,
and may therefore yield greater rewards or greater losses.
7. The stock market lets you track stock performance. Stocks are traded on "exchanges," which make up
the overall market. The major stock exchanges in the US include the New York Stock Exchange (NYSE)
and the Nasdaq. Stock prices are also tracked on indices such as the S&P 500 and the Dow Jones Industrial
Average. While you'll want to check in with your individual investments, monitoring stock market activity
can give you an idea of how your portfolio might be performing.
8. Bonds are loans you make. When you purchase a bond, you're essentially loaning a little money to an
entity — like the US government, for instance — and that entity has to pay you back after a fixed period of
time, with interest. There aren't bond exchanges that show up in a ticker, because bonds are traded
differently than stocks. However, there are sites where you can get an idea of bond pricing, like the Wall
Street Journal.
9. Diversification means spreading your money out among different kinds of investments. There are a lot
of opinions out there about how diversified an investment portfolio needs to be, but most everyone agrees
that putting all of your financial eggs in one basket is a recipe for disaster. If you have diverse, or varied,
types of investment, you keep your risk level lower.
10. The ROI is how much money you make on your investments. To get an idea of how well your
investments are performing, you can calculate the return of investment, or ROI, by dividing an investment's
gains by its costs.
11. You'll probably be charged fees. Investing isn't free. If you're working with an investment professional,
you'll pay them either a percentage of your portfolio or a flat fee (you'll want to know if your advisor
is "fee-based" or "fee-only" before you sign on), online investment platforms or "robo-advisors" each have
their own fee structures, and some mutual funds and ETFs also charge fees. These fees vary, and if you do
your research, you can minimize them.
12. You don't have to pick stock by stock. Professionals collect groups of securities called mutual funds, and
you can invest in these funds to diversify your money without picking every individual stock or bond
yourself. Index funds are mutual funds chosen to reflect a specific stock index, such as the S&P 500.
13. You may have to pay taxes due to your investments ... The US government doesn't let you have the
money you may make investing for free. When you cash in, you'll owe what's called capital gains taxes.
14. ... but you also may receive a tax break. Although different retirement accounts have different tax
structures, contributions to retirement investment accounts like a 401k are often tax-deductible. 529 savings
plans, which are also investment accounts, are similarly tax-advantaged.
15. Sometimes, you'll fail. It's an unfortunate truth that we won't all be rock star investors. For some people to
do really well, others must do poorly. And sometimes, you're the "other."
16. Starting early is a major advantage. In your 20s, your biggest asset is time. Even when you're just
investing in retirement savings, nothing can make up for the effect of compound interest. Also, if you lose
money in the market you'll have more time to make it back before you need it.
17. Your long-term strategy has nothing to do with that morning's news. Most investors shouldn't "buy" or
"sell" every time it's recommended on TV. There's an entire documentaryexplaining why active investing —
buying and selling stocks strategically and often — doesn't work for most people.
18. Don't invest money you'll need soon. If you'll need quick access to liquid cash in the short term, you won't
want to park that money in the stock market. Some professionals say you shouldn't invest money you'll need
in the next five years, because if the market goes down, you won't have enough time to recoup those funds.
19. No one can reliably predict the market. They just can't. While professionals can make educated guesses,
predicting the market is predicting the future, and no one can do it. Past market behavior isn’t a reliable way
to predict the future, either.
20.
You don't have to do it yourself. You don't have to be an expert to invest. There are financial planners,
wealth advisors, and even automated online investing platforms (robo-advisors) to guide you.