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How to Pick the Best Investments for Your 20s

Investing in your 20s and finding the best investments means understanding asset classes and how much to buy in each

One of the most important concepts in meeting your investing goals is changing your investments depending on your age and other factors. Studies have shown that the majority of investment returns are due to your choice of asset classes rather than picking the best stocks. Starting investing can be difficult enough without having to worry about finding the best investments.

That’s why I’ve started this series of posts looking at the best investments by age. We already took a general view in our guide to investing by age infographic. In this article, we’ll start looking at the best investments for particular age groups.

Read Next: Investing in Your 30s for Faster Growth

Check out the rest of the investing by age series to meet your lifetime investing goals:
How to Invest in Your 40s for Returns and Dividends
Investing in Your 50s for Growth and Safety
Investing in Retirement: 60s and Beyond

What is Investing by Age?

Investing according to your age is all about asset allocation. Assets are just larger groups of investments that share common drivers in the economy. The most common asset classes are stocks, bonds, real estate, and alternative assets like private equity and startup investing.

The idea is that each asset class offers different risks and returns. Stocks offer the opportunity for higher returns but can crash quickly. Bonds do not offer as high a return but do not fall as badly either. Real estate offers cash flow and protection against inflation.

You’ll always want some of each asset class in your portfolio but holding more of one or two particular classes depending on your age will help you get the very best trade-off between risk, return and your own investing needs.

We talk more about the different asset classes and how diversification means I don’t have to worry about a stock market crash in this article.

What Should My Investment Assets Look Like in My 20s?

So investing in your 20s means you’ve got at least 30 to 50 years before your biggest investing goals. You may need money for your kids’ education or that dream vacation along the way but retirement saving is by far the largest chunk of money you’ll need in your life.

Investing by age and finding the best investments for your 20s means looking at how long you have to retirement and your needs for cash from investments. Since you have so long before you need the money, you can afford to take more risk in your investments. Sure, your riskier stock investments might tumble in the next year or two but there is a 99.9% likelihood that prices will be higher over the next few decades.

The example asset allocation below is based on recommended models and my own experience. Your own investments might differ if you have a higher- or lower tolerance for risk.

Investing in your 20s will mean holding a higher amount of stocks and alternative assets with less money in cash and bonds. The cash and bond investments are basically there to provide the opportunity to buy more stocks in the event of a market crash. The amount in real estate through REITs which trade like stocks can provide a little of everything including a little cash flow, good returns and inflation protection.

investing in your 20s

Resist the temptation to put all your money in just one asset class. Not only do the different asset classes provide different levels of returns but they also react differently to the economy. You need that diversification even as you’re investing in your 20s.

Buying individual investments within each of these asset classes can get expensive even on the cheapest discount investing sites. You’ll need a dozen or so investments in each asset class to get the diversification you need and will be buying more each year. It’s why I so highly recommend Motif Investing.

Motif allows you to group investments, whether stocks or funds, and then buy the whole group with one commission. You could create a motif around each asset class or just one motif for all your investments and then pay one $10 commission each quarter to buy more of the entire group. Check out this full review of Motif Investing and how I created four funds of my own.

Best Investments within Asset Classes for Investing in your 20s

You can also take the idea of your risk/return trade-off into each asset class to find the best investments for investing in your 20s. This means picking individual stocks that may be a little riskier but have a higher potential for return over the longer-run.

best investments investing in your 20sWithin stocks, that means going with smaller companies and growth stocks. One of the stock market anomalies we looked at in a recent post is the fact that stocks of smaller companies tend to beat other stocks. Growth stocks are companies that have higher sales growth compared to others in their industry. These stocks are usually a little more expensive than other investing themes but do well over the long-term.

Some of the best investments in small cap and growth stocks include the Vanguard Small-Cap ETF (VB) and the Vanguard Growth ETF (VUG). Funds available on Motif Investing include the Small-Cap Stars and the GARP Fund (Growth at a Reasonable Price).

You can also skew your bond investments toward a little more return with corporate bonds and high-yield bonds rather than holding government or municipal bonds. These investments will still be relatively safe compared to stocks but will offer higher return.

A word of caution. As I write this article, we are in the seventh year of higher stock prices which is the second longest run in history. While stocks could continue to move higher for several years, prices are getting expensive and there are a lot of reasons to be worried. Interest rates are at historic lows and nobody seems to know how to get the economy moving.

I don’t like to ‘time the market’ by suggesting you hold less in risky assets than you normally would according to your age but you might want to adjust your assets to have more in bonds and cash. The odds are good that stock prices will come down over the next year and you’ll be able to start your investing portfolio with a better outlook.

Of course, the downside to investing in your 20s is that you probably won’t have much money to get started. With a small amount to invest, the high fees on some investing sites can eat into your returns even on the best investments. It’s a big part of the thinking that went into this list of how to invest $1,000 now along with one investment that could hold up against a stock market crash.

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