How can I invest in my mid-20s with potential for high returns without tremendous levels of risk?
I'm interested in starting a portfolio, with the goal of compounding returns and potentially providing enough income to retire young. Most advice I've read seems to indicate that I can afford to take on slightly more risk at a young age since my time horizon is longer. I'm not interested in day trading, but investing for years at a time seems like it might be too slow paced to keep me interested. What suggestions do you have for someone interested in starting a career in investing who wants potential for higher returns without getting into tremendous levels of risk? What should I look out for, what potential instruments/strategies give me the best chance at growth and income?
You can't receive high rates of return with no risk. The economic and investment system does not work that way. There are obscure situations that fall out of this norm but finding unicorns are difficult. I would not buy individual stocks but the easiest way is to buy a diversified basket of index funds. They are cheap, tax efficient and assuming that history repeats at some level, you have the potenial to make a tremendous amount of money by the time you retire. That is your best odds on chance to accomplish what you outline above.
Congratulations on getting interested in investing – that’s an important first step. The advice you’ve read about taking on a little bit more risk is correct, although the exact balance you’ll want to strike is a personal decision based on your individual goals, time horizon and tolerance for weathering the inevitable ups and downs of the market.
If you’re working, you should check and see if your employer offers any retirement plans. If you have access to a 401(k) plan, this is a great place to start building an investment portfolio. With 401(k)s, you can “set and forget” contributions, meaning you can withhold a percentage of your paycheck every month and have it directly invested in a tax-sheltered account. Even though you won’t have access to it for a while, this will enable you to save for retirement over the long term while focusing on the shorter-term investments, and often employers will match a percentage of your contributions – generally within 3% to 6% – so if you can, I encourage you to contribute at least enough to get the full match. It’s essentially free money.
We recommend keeping your cash in a high-yield savings account - this is a 100% liquid cash account that, in many cases, pays around 2% in today’s environment. High-yield accounts offer much better rates than a typical money market account and don’t have the liquidity issues of CDs in case you need to withdraw from it for an emergency or for short-term savings goals.
If you don’t expect to need the money in the near future, it may make sense for you to look at investing in a low-cost mutual fund or ETF, but again, I recommend consulting with a Registered Investment Advisor (RIA) to discuss the best path to reach your financial goals. An advisor can help you determine the appropriate asset mix for the level of risk in your portfolio, as well as the return you can reasonably expect.
Great that you're not interested in day trading, a sure fire way to lose money and waste time.
I recommend you open an investment account at a reputable low-cost online broker. Charles Schwab, Interactive Brokers, and TD Ameritrade are good choices. Also, consider engaging an authorized, independent advisor at one of these brokers.
Invest in stocks and equity ETFs. Diversify. Don't overtrade. If you want to shoot for even more significant gains, consider a margin account or buying call options. That gives you leverage, but don't overdo it. Margin and options are risky; a little goes a long way.
When seeking investment advice insist on the fiduciary standard of care. Require that your advisor provide you with a written statement of their fiduciary commitment to place your interests first.