How should a person in their early 20s invest their money?

How should a person in their early 20s invest their money? -

So you’re a 20-something year old who wants to become a millionaire or billionaire one day?  

Maybe you’ve got $500 in the bank… are living paycheck to paycheck, and filled up with student loans.  Well, the advice I’m about to give will take you to the next level.  And yes, it could make you a millionaire… or even richer.   

My recommendation: 60% stocks, 20% bonds, and 20% real estate.

Bonds & real estate provide necessary diversification, limited downside risk and a continuous stream of dividends.

For example, I know that my two-family real estate investments (purchased at a discount, fixed up & rented out) will yield a stable 12% year after year and will probably outperform the stock market.

Some may believe 10% to be an unreasonable rate of return, but 10% is the average return over the entire history of the US stock market – a market that has weathered world war, depression, and hyperinflation.

There is no reason to expect otherwise over a long-term 40-year period (for reference, the most recent 40-year period 1973-2013 yielded 11.43%).

Although I may just be lucky, here are four examples of my own personal investments that have more than doubled the S&P-500 benchmark over the past five years (ticker SPY 5% over 5-years).

Some insight into how I chose these investments:

RSP Rydex Equal Weight S&P 500 (7% five-year return): the neglected issue with traditional S&P index funds is that large companies like Apple & Exxon take up 8% of the fund.

With an equal 0.2% weight given to each of the 500 companies, you’ll get true diversification & outperformance.

HSCSX Homestead Small Company Stock (13%): I inherently favor small companies and this contrarian fund concentrates on out-of-favor firms ready to turn around.

FNMIX Fidelity New Markets Income (11% with a 4% yield): as international stocks often don’t outperform those from the USA, I focus my international exposure on high-yielding dollar-denominated emerging market bonds.

FBIOX Fidelity Select Biotechnology (19%): I often invest in sectors I believe to be promising. Billions of overpopulation? Fat Westerners prone to diabetes? Possible bird flu pandemic? Genetic sequencing & new drug therapies?

This fund is my #1 performer, but possibly overvalued now.

How should a person in their early 20s invest their money? -

The single most important thing is to invest in yourself.

Be financially literate and learn new skills such as the Excel modeling and asset allocation strategies detailed herein.

Be the very best at whatever you do.

Continuous education & aggressive professional diligence. (And by education, I don’t mean going $150,000 into debt for an art history degree.

Let me be one of few to emphasize that the education industry is quickly turning into a fool’s scam and unless you’re attending a top-20 school, skip it – you’re better off working or going to a decent state subsidized college where you’ll get the same education at 1/4 the price.)


Invest in life

Have fun. Travel the world. Go to the movies. Invite a friend. Eat lobster. Give a homeless person $20. Buy a trombone. Split a meal. Take a cab. Play laser tag. Go to a concert. Get the most expensive coffee.

Not all of the things spend money on have to make sense to make sense. Experiences have a funny way of working out, but ultimately, they almost always lead to more happiness. So whatever you spend your fun money on that’s an adventure will pay for itself ten times over.

I put 5% of my pre-tax income into this, plus some of what’s left over after paying rent and food.

For the 22-year old, this is a boring yet tried-and-true investment method that will make you rich over time, richer than most rappers who’ll blow their money on cocaine and other stupid stuff.  


Now assuming you ain’t no scrub – you’re investing in yourself, saving 20% of your professional income, working hard, and learning to be an astute investor, I now revise my Excel and entitle it – “How to Make $20 Million Dollars”:

* Want an extra $5,000,000? Save 25% instead of 20%!



Wealthy investors understand this concept better than most which is why you sometimes see sharp over corrections in the market from options & algorithms that automatically trigger a “sell” – they would rather liquidate in advance of a truly scary situation than risk losing a large percentage of their capital:


#1 Market crash & asset bubbles, roughly every 10 years

If an asset class inflated by credit does not generate enough cash to service the debt, divest.

Even I had good enough sense to recognize the pig that was the housing bubble and liquidated every single stock investment a year before that crash.

#2 Dumb ass investments

Do you want to build a restaurant to “entertain your friends?” Did you hide your money in Cyprus or some equally bad socialist European nation?

As soon as you made some money, did you buy a yacht or Porsche to show others you’ve “made it?”

#3 A bad marriage or catastrophic illness

Divorce or bad partnerships will wipe out half your net worth. Doing such a thing twice will decimate even a $10 million fortune. Choose wisely, and stay healthy. Don’t race trains and avoid all AIDS situations.


I’m really tempted to model another Excel illustrating how riding market bubbles (bitcoin, anyone?), a fun night in Bangkok and a 50% shave from a bad divorce will affect your net worth.

But in this scenario, AIDS will strike you down before I reach line 65… so my advice, which took me 90 minutes to formulate, would be wasted. Anyway, I hope I have been of assistance – thank you for listening and please comment.

How should a person in their early 20s invest their money? -

If you’re located in the United States, this advice is for you.

The single most important thing to do at 22 with regards to investing is to open a Roth IRA account and make the maximum yearly contribution.

Investing 5k every year should lead to well over a million of tax free money at age 60. You can open a Roth IRA account and pick how you want to invest at any brokerage firm like Vanguard, Fidelity etc.

If your company has a 401K matching program, take advantage of that. If not, decide if you want to do 401K and how much to put into it.

Open a savings account at Emigrant, ING, AllyBank etc. and get the 1-2% interest that they provide instead of having your money sit in a traditional Bank of America account and collect negligible interest.

I’d suggest putting 20-25% of your saving in cash regardless of your investment strategy.


Take your remaining savings and invest it in index funds.

Maybe 1 US index fund and 1 international index fund for starters.

The simplest and arguably best way to invest to do so at fixed intervals (maybe once a month) into a pool of index funds. Vanguard has some pretty standard and inexpensive options here.

If you find that you can’t seem to get yourself to follow the stock market at least a couple times a week, stick with the periodic index fund investing approach.

If you are pretty savvy about following the market, you may consider diversifying a small amount of money into some bond funds, sector funds like HealthCare, specific foreign funds like BIK (BRIC countries), FHKCX (China) etc, or a real-estate fund if you don’t own any property.

I’d stay away from individual stocks for the most part – everyone thinks they have a unique angle on a company but the market is often way ahead of you.

Picking the right individual stocks gives you the most bragging rights in social circles though!

For your specific example in this question, looks like you are looking at about 30K/year post tax and expenses.

Maybe put 7.5K in cash at a 1-2% interest place, 15K in a couple index funds, 7.5K in some more specific funds.


Investing is a plan, not a product.

Plans have goals.

The question does not specify what is your goal. But since you have asked this question, it means that you are looking to make some money by investing money.


It is wise to divide your investing plan into 3 parts.

  • A plan to be secure
  • A plan to be comfortable
  • A plan to be rich


Let’s take them one by one

Plan to be secure

A plan to be secure should do as it says, make you secure. It should protect you against calamities, health problems, accidents etc. A good insurance plan that covers your medical expenses should be good. Also saving money equivalent to a 3 months salary is wise for a rainy day.


Everyone should have a plan to be secure

Now before I move on to the second or third plans, it is important to that you define your goals. Ask your this question “Am I wanting to be comfortable or am I wanting to be rich??”

This is an extremely important question to answer, as it will determine your investing plan. I would suggest you to read the rest of the answer to get a better idea about what you will need to do if you chose either plan.

This choice is similar to buying a gym membership. You may choose to have a light jog on the treadmill, or you can sweat it out with weights. The choice of your goal determines your actions.


Plan to be comfortable

Choose diversified mutual funds, dollar cost your investment, manage your equity to debt ratios, save taxes using all the available options and invest for the long term.

Also, have a good financial planner who can guide you with your plan. Leaving any financial calamity aside, you should be reasonably well off in the long term.


Plan to be *Rich*

Q: “What is your advice for the average investor?”

A: “Don’t be average”


Because average investors depend on the market to make money.

Because average investors make money when the market goes up and lose money when the market goes down.

Because average investors don’t have much control over their financial returns

Because average investors think that they take less risk, but they are the ones who take the most risk.


Average investors buy investments and then hope that they will go up. Rich investors know that hope is a poor way to invest.

Rich investors have a plan for their investment when the market goes up, down or does nothing.

Rich investor seek control


So how is an average investor different from a smart (rich investor)?

I hope the following conversation will make things clearer.


Avg Inv:  My house is an asset.

Rich Inv: My house is a liability.


Avg Inv:  Don’t take risks.

Rich Inv: There is always risk, so learn to control and manage risk.


Avg Inv:  Diversification is risk reduction

Rich Inv: Diversification is useful when you don’t know what you are doing


Avg Inv:  Mutual funds are good and safe investments

Rich Inv: Mutual funds are poor investments, and useful only when you sell them.


PS: If you think mutual funds are safe, walk into a bank and ask to borrow money to invest in mutual funds. It should be fun.


Avg Inv:  The market is falling, I should sell

Rich Inv: The market is falling, its time to buy


Avg Inv:  That’s risky!

Rich Inv: Risk comes from not knowing what you are doing


Avg Inv:  I bought that stock, I hope it goes up

Rich Inv: I bought the stock at a favorable price and put a stop loss protect my downside


Avg Inv:  All my friends invested in this fund, so it must be a good investment

Rich Inv: The risk/reward ratio looks good, so it might be a good investment


So, rich investors have a very different mindset from the average investor.

Don’t get me wrong, what the average investor is saying above isn’t bad advice, but its average advice.

As I mentioned, average investors make money when the market goes up and lose it when the market goes down.

How should a person in their early 20s invest their money? -

Average investors buy and hope that the market goes up.

Rich investors plan what to do with the investment if the market goes up, when the market goes down or the market goes sideways.


Broadly there are 3 E’s that rich investors have that average investors don’t

  • Education

Rich investors spend a good portion of their time and resources into their education. This is essential to know market trends, and to learn how to take control in their investments.


  • Experience

Because of a good education, they are able to minimize risk as they start small and practice their skills to gain experience


  • Excessive cash

When you have a good education + experience, excessive cash soon follows.

Now that we’ve covered the basics, it’s time to learn some basic rules of investing.


Investing in business and the business of investing

Whether you realize or not, you are always investing in a business.

When you buy stocks, you are investing in a business.

When you buy real estate, you are investing in business.

When you buy bonds, you are investing in business


The thing is, business and investing go hand in hand. The better business skills you have, the better your investing decisions are, and the better your investing skills are, the better your business skills become.


It is important that you sharpen your business skills to be a better investor.

Successful investing is not about the investment, it’s about the investor.

This is perhaps the least and most misunderstood concept in investing.

This is the reason why people ask questions like “Where should I invest my money?”, and the answer is that there is no right or correct answer.


Let’s try to understand this concept with an example. Suppose that you were invited to have a friendly racing session with F1 guys on the track. You were given a race car like the other guys and were asked to drive just like they do and at the speeds they do.


What do you think will be the result if you attempt that?

A possible crash?

A sprained neck because of the downward G-force?


The result would not be pretty in any case.

Now you may blame the car, the circumstances or god for the bad outcome, but the reality is that your skills of driving an F1 car at high speeds are not good enough.

Investing is very similar. Unless you have good skills as investor, the best investments will be the riskiest for you, but safe for a skilled investor.


Diversification vs Focus

If I were your career adviser and I told you to invest 15% of your time to be a doctor, another 15% to be an engineer, 20% to business skills, 20% to arts, 15% to philosophy and 15% to be a fashion designer because it diversifies your skill set and reduces career risk, you’ll fire me in a minute and call me crazy.

But a financial adviser would give you give you similar advice and you’ll happily pay him. (Talk about discrimination).


The point is diversification is average advice. If you want to put your money everywhere and pray that more of it goes up that it goes down, then you are welcome to do it, but i’ll pass.

The message most financial management companies give out in their ads is that managing money is hard, so give it to us.

The reality is that doing anything is hard if you don’t have the skills or the experience. If I try to do graphic design, then i’ll probably suck, but I spend a few months learning it and practicing it, then i’ll definitely get better. Most people don’t take charge of their finances themselves.


Business and Investing are team sports

The most successful people in the world have coaches. Christiano Ronaldo and Messi may be few of the best football players in the world, but they still have coaches and train to sharpen their skills. They have a team who helps them win.

When a movie is made, then a team of actors, cameramen, directors, produces, script writers work together to make it successful.

Similarly, in the investing world, you should also have coaches. Here you would have mentors, advisers, accountants, CPA’s, lawyers as your team.

You may not have a team today, but as you start your education and become a better investors, start building your team.

An investment should make sense if the market goes up, goes down or goes nowhere

This is kind of a litmus test for an investment and almost all average investment advice would fail this test. To understand this concept more, let me remind you of the important investing principle


“Investing is a plan, not a product”

The lesson here is that whatever the investment, there should always be a plan for if the market goes up, goes down or goes nowhere.

Profit is made when you buy, not when you sell

This is another litmus test for an investment. Whenever you are investing in something, ask yourself this question, “Will I able to make money with this without selling it to someone else at a higher price?”

If the answer is no, should you probably rethink your investment and how you will generate returns from it.


Planning your exit before your entry

If you are leaving home in your car, you usually have decided where you will get off even before you sit inside. In other words, you are clear about your exit from the vehicle before entering it.

Similarly when you invest, it is wise to plan your exit from the investment before you enter it.

PS: It is not a coincidence that investment assets are also called investment vehicles


Professional IQ vs Investing IQ

People usually think as they are doing extremely good in their professional life, it automatically means that they will be decent investors. The truth is that investing too is a profession which requires a completely different mindset and skill-set from other professions.

There is a great story that will express the importance of this concept.

Once upon a time, in the year 1700, there lived a great man whose intelligence was extraordinary, and who invested in the stock market boom then.

A particular company that was booming that time was the South Sea Company. The man invested in the South Sea company.

A little while later he sold the investment and made a little money. But the company’s stock price kept rising and he invested again. Briefly after that, the stock went bust and he lost around 2000 pounds (a significant amount of money in 1700). That was almost 90% of his total holdings.

That man was Sir Issac Newton!

Yes, the man who invented calculus in his spare time and penned the 3 Newton’s laws of motion, lost 90% his money while investing it.

He may be the most intelligent mathematician and physicist, but he was certainly not an extraordinary investor.


Knowledge is an unfair advantage

We live in a fast changing world, also called the information age. Gone are the days when you could get a job, stick with the company, retire and live on a pension.

The world is changing fast and in this world, your knowledge is your real wealth. The better investing knowledge you have, the better your chances of being a successful investor. Quoting one of my mentors,

“If you have a solid financial education, then taxes, debt, inflation and retirement can make you richer, not poorer!”

Read the Strawberry Startup ebook

Closing words and the real answer to this question

Q: “How should a 22 year old invest his/her money?”

A: “I don’t know, are you a good investor?”

Now after reading my full answer, hopefully you understand that there is not straightforward answer to this question.


One Reply to “How should a person in their early 20s invest their money?”

  1. Startup Storey says: Reply

    Hi Marlyn, we just checked – there does not seem to be an issue on our end. What issue do you face when you open Internet Explorer? Is your version outdated?

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