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Investment Risks You Should Take in Your 20s

Investopedia logoInvestopedia 17-06-2015 Dan Moskowitz
You can take more risks when investing in your 20s, but not until you do this first.© Thinkstock You can take more risks when investing in your 20s, but not until you do this first.

If you’re in your 20s, you have an exceptional opportunity to increase your net worth and savings for retirement. It’s not going to be easy and will take time. Slow and steady wins the race. This contradicts the common belief that you should take more investing risks in your 20s. There is a middle ground. You should take more risks in your 20s, but you shouldn’t put all your eggs in one basket. Establishing what investing risks to take in your 20s isn’t complicated, but there is one step you must take prior to investing in anything.

Pay Off Debt

The average annual percentage rate on a credit card is 14.95%, according to CreditCards.com. If you invest in stocks, you should aim for a 10% annual return. If you took a specific amount of available capital and invested in stocks and saw a 10% return, you would actually be losing money because your debt would cost 14.95% if you had credit card debt. If you took that same capital and paid off your debt, you would be in much better shape. Interest rates on student debt are usually lower, around 5%, but all debts should still be paid off prior to investing, aside from a 401(k) that is eligible for a matching contribution. (For more, see: Expert Tips for Cutting Credit Card Debt.)

Small-Cap Stocks

Small-cap stocks offer more upside potential than mid-cap and large-cap stocks, and you can make any potential losses back with income generation. If you choose to allocate some capital to small-cap stocks, which is recommended as long as you’re not saddled with debt, then look into cybersecurity, healthcare and alternative energy. These industries are likely to remain hot for different reasons. (For more, see: Top Healthcare Stocks Fueled by Obamacare.)

Hacking is at an all-time high, and hackers are now getting into top government organizations. The demand for cybersecurity is almost certain to increase. Healthcare should remain strong because an average of 10,000 Baby Boomers are retiring per day. They will also live longer than past generations. As a result, demand for healthcare should remain high for decades. As far as alternative energy, some of the biggest corporations in the world are looking to reduce their carbon footprint while saving money at the same time. It’s possible that oil will one day be today’s coal. (For more, see: Top 10 Alternative Energy Stocks for 2015.)

Diversification

This doesn’t mean you should invest solely in small caps. You want to balance between your portfolio across all market caps. You also want to be diversified across several industries and add bonds and certificates of deposit (CDs) to the equation. If this sounds overwhelming, hire a financial advisor to help you. Given the current economic environment, it’s highly recommended that you do a great deal of research on the financial advisor you choose. There is no telling how markets will hold up when central bank support is removed or becomes ineffective. This brings me to the next point. (For more, see: The Importance of Diversification.)

Invest in Yourself

If you haven’t gone to college, strongly consider doing so. If you’re in your 20s, it’s not too late. If you go to college with a specific goal in mind, your odds of succeeding will be much higher. Choose what you love and hone your skills in that area. It could end up saving your financial situation. The point is that when you invest in yourself, you give yourself more upside potential than you would have through investing alone. Investing should be seen as supplemental source of increasing your net worth. The most money you accumulate throughout your lifetime will be generated by your career.

The Bottom Line

Pay off all debts, especially credit cards because of the high interest rates. Find a financial advisor that will help with your investments and future goals. Most importantly, invest in yourself before anything else. (For more, see: The Complete Guide to Retirement Planning for 20-Somethings.)

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