Investing In Your 20s & 30s

8 December 2020
Investing as a younger person can be difficult and complex to understand given how busy life can be in your 20s and 30s. Here are a few things we have learnt from experience:

1) Start as early as possible – It’s important to start investing as early as possible for several reasons. A longer time horizon allows you to benefit more from the effects of compounding your capital. For instance, assuming consistent annual returns of 8%, investing for 40 years (20 times return) will provide a return double that of a 30-year time horizon (10 times return). A longer time horizon also provides the benefit of being able to make up periods of underperformance as well as from more market experience.

2) Consistency – to provide the best chance of success, being consistent in saving and investing is essential. The benefits of investing consistent amounts over time, otherwise known as dollar-cost averaging, has been well recognised for many years. This approach is market neutral and avoids the emotion of trying to pick market highs and bottoms. Saving consistently is also a game-changer for many, allowing funds for a ‘rainy day’ to be accumulated over time. There are many automated tools available to assist with consistency.

3) Budget – We don’t believe it’s necessary to budget and track every single dollar you spend. We do believe, however, that it is necessary not to waste money on unnecessary expenses. That $80 a month gym membership you might use only occasionally, adds up to almost $1000 a year. Not shopping around for the best deals for commodity services like insurances, electricity etc will have you spending more than you need to. Today having a ‘side-gig’ for extra income is easier than ever and may help you to achieve your financial goals much faster via additional income.

4) Track your Superannuation – Your superannuation is your money and has value. Many people don’t understand or care about their superannuation until it’s too late. If you’re working, make sure your employer is paying your superannuation as they are obligated to by law. Be informed about the best superannuation fund for your needs and don’t be afraid to change funds if need be. Superannuation has tax advantages, so selecting a high performing superannuation fund can substantially improve your financial position.

5) Diversify– Don’t put all your eggs in one basket – to mitigate risk it’s best to diversify your investments. No matter how safe you think an investment may be, it’s always best to think of what the worst-case scenario is and allocate your money accordingly. Appropriate diversification also mitigates the risk of under-performing, so is an important consideration.

6) Recognise the difference between assets – there are two types of assets: ones that depreciate in value and others that can appreciate or provide value. For instance, money invested into a car is typically lost over a 2-3 year horizon. Whereas funds invested in productive assets like a business, stocks or property have the potential to provide a profit over a similar time horizon. Understanding the difference will save you thousands in opportunity costs.

7) Take reasonable risks – the younger you are, the more risk you can bear generally. Accordingly, it can be prudent to use leverage wisely and to your advantage to accentuate your returns when the odds are in your favour. For instance, if you have the opportunity to acquire a small business or another sustainable income-generating asset for a cheap price; using leverage may improve your return on equity. However, over-leverage is a danger that investors should always remain aware of.

Main Image Source: Gopixa (Shutterstock)

This article was reviewed by our Content Producer Isabella Shoard before it was published as part of our fact-checking process.

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About Emanuel Datt

Emanuel DattEmanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities. Emanuel has obtained a Bachelor of Commerce (International Business) from Deakin University, a Master in Applied Finance (Corporate Finance) from Macquarie University and is a graduate and current member of the Australian Institute of Company Directors.

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