As a 19-year old trying to achieve financial independence, what should I consider when looking for long-term high-yield investment vehicles?
I am 19 years old and I would like to achieve financial independence, which is $525,000 in my case. I have about $8,000 readily available to invest and can contribute an additional $650 per month. What should I consider when looking for long-term high-yield investment vehicles so I can reach that number safely and efficiently while beating inflation?
It's great you've begun thinking about investing so young. You'll have added years of compounding at your back!
First, I'd be curious as to where you got your $525,000 from? Over time, inflation will push that number up. If you wanted to become "financially independent" by age 40, you're likely looking at a much higher number. For example, let's assume an inflation rate of 3% over the next 20 years. Inflating the $525,000 in today's dollars that it would take to achieve financial independence in your case would be equivalent to roughly $950,000 in 20 years. Of course, that's why we invest!
Investment vehicles you should consider are a Roth IRA and taxable brokerage account. A Roth IRA allows you to pay taxes at your tax bracket today in exchange for tax-free growth. Meaning you can withdrawal the funds tax-free for retirement after age 59 1/2. You can also always access the contributions to the account without penalty. The taxable brokerage account could be used for anything in excess of the maximum Roth IRA contribution amount. The brokerage account doesn't have any tax advantages, however, you'll be able to access principal and earnings without penalty whenever you want.
As for types of investments within these accounts, building a low-cost diversified portfolio geared towards equities would be your best bet for the long-term. Index funds and ETF's allows you to achieve the low-cost goal while providing broad diversification among their respective indexes. For example, an S&P 500 index fund owns all the stocks within the S&P 500 and therefore tracks its performance. It's an easy, and proven way to have success as a long-term investor.
Equities aren't considered "high-yield" investments, however, historically they offer growth of capital. As a young, long-term investor, you want to gear towards investments that offer growth, not income.
Congratulations on getting started with investing while you're so young! If you stick with it, you'll be great condition whenever you decide to retire.
Be careful that you don't fall prey to sales pitches promising above average returns while keeping your principal safe. They don't exist! If they did, we'd all flock to them! Instead, keep a long-term perspective and understand that markets will fluctuate. At your age, a market drop is actually good news as it will allow you to purchase more shares at discount prices!
A few fundamentals for success: Invest regularly. Keep costs and taxes low using no-load index funds. Diversify, which is cheap and easy to do with the same index funds. Re-balance at least annually, but no more than quarterly. Invest in equities from around the world, not just the US. Understand your risk tolerance and invest accordingly. Write out your Investment Policy Statement (IPS) and stick to it! Avoid debt. Avoid lifestyle creep as your income increases. Finally, stay the course! Don't let the markets or pundits sway you from what you know works!
Good luck and thanks for your question!
If you invest in the S&P 500 you will have a good shot at achieving that goal by 55-60. High yield stocks or bonds are risky and not appropriate for long term capital growth. Invest in a diversified basket of stocks and dont sell when the next bear market comes. Just keep adding. Easy to say. Hard to do. But not selling at bad times will improve your chanced of great success.
If you start with $8,000 and invest $7,800 per year you will have to live a very long time to get to $525,000. I recommend a little perspective-shift.
First of all, don't take crazy risks that could cost you most of you nest egg. Diversify your portfolio into equities that on balance are small and fast growing, but no one holding should be more than 10% of your portfolio. Companies like this usually do not pay any "yield" at all; that's OK because if they reinvest all their free cash into their business, it benefits you as part-owner of the company. By all means build the portfolio with regular deposits but know that two things will happen: (1) in a few years you might be able to save a lot more than $650 per month, which is good; and (2) by the time you are 40 you will realize that $525,000 is a nice nest egg but you can't live on it and nothing else. At that point "financial independence" might require $6 or 7 million (in today's dollars).
So, the best way to get there is to start now and not let up. Good luck.