If you ask the average middle-aged or senior investor how well they performed as an investor in their 20s, the majority of them would likely say, “Not very.” That’s because perception is so different when you’re in your 20s. Not only do you think you will live forever, but you want in-the-moment money for immediate needs and wants. Most twentysomethings aren’t thinking about future expenses and retirement. Fortunately, there are ways to generate relatively fast money while also saving for future expenses and retirement. (For more, see: Retirement Investment Strategies by Age.)

Since the dotcom bubble, we've lived in a highly volatile economic environment. A lot of people don’t realize that the dotcom bubble of 2000 — a period where many internet startups generated no profit — played a major role in today’s boom-bust economy. Put simply, the Internet crash, combined with the economic effects of 9/11, led to then record-low interest rates. This, in turn, led to the real estate bubble. That bubble crashed several years later, soon followed by the stock market. The end result? New record-low interest rates. (For more, see: What Tech Investors Learned From the Dotcom Crash.)

This has led to what might be the biggest stock market bubble throughout history. When interest rates are low, borrowing costs are cheap, which leads to debt-fueled growth. But without enough demand in most industries due to a lack of wage growth, this is not sustainable. Eventually, interest rates will increase, which will make those debts more expensive. This will cut into cash flow allocated for growth due to necessary debt repayments. And the vicious cycle begins. This could lead to a crash in stocks of around 50%. You can read and listen to all the economists and pundits you want about staying the course, but a 50% haircut to your portfolio will take years to make back, if not longer. 

Sounds scary, doesn’t it? That's good. It’s supposed to scare you. I’m not about touting investment ideas for young investors that will end up leading to financial ruin. Avoiding disaster is more important than growth potential. The stock market might move higher for a while, but the current bull run isn’t sustainable. (For related reading, see: Playing the Bull Run Without Worry.)

Don't Shun Stocks 

That said, this doesn’t mean you should avoid stocks. The difference between today and a normal stock market environment is that now you need to be highly selective. Avoid investing in companies that rise with the tide. Instead, invest in firms that offer revolutionary technologies. The stocks of these companies will still take a hit in a bear market, but thanks to their innovation, not only will they be capable of coming back, they'll thrive. 

A few examples of companies that have offered such products or services over the past decade are Apple Inc. (AAPL), Netflix, Inc. (NFLX), and more recently, Tesla Motors, Inc. (TSLA). Without getting into individual stock ideas, two future growth industries are likely to be cybersecurity and alternative energy. (For more, see: The 5 Industries Driving the U.S. Economy.)

If you choose to invest in a small-cap that you deem to be the next Apple, Netflix, or Tesla, then strongly consider dollar-cost averaging. This will reduce risk and you will still have plenty of potential for excellent returns over the long haul because you will be buying more shares at cheaper prices.

Another long-term approach to building wealth is to apply a dividend reinvestment plan to large-cap stocks that pay sustainable dividends and offer more resiliency to bear markets. This proven strategy allows you to reinvest your cash dividends by purchasing additional shares on dividend payment dates. Better yet, most DRIPs allow you to buy shares commission-free and at a significant discount to the current share price.

As far as real estate is concerned, you don’t need to own actual property. Owning properties can cause a lot of headaches, especially if you have a bad tenant and/or maintenance problems. Instead, look into REITs—real estate investment trusts. With a REIT, you're essentially investing in a management team to run the property. In addition to a quality management team, you also want to invest in one that’s in-line with current and future trends. For example, healthcare facilities, urban shopping, and apartment living are good places to be at the moment, and this is likely to remain the case over the next several years. You might want to avoid any type of REIT tied to suburbia. REITs are also appealing to many investors because they offer high dividend yields. (For more ideas on REITs, see: Key Tips for Investing in REITs and Top 10 REITs for 2015.)

Disperse Funds Artfully 

After the initial scare, you might be asking yourself why I included information on markets that have seen crashes in recent years. Historically speaking, no type of investment has grown faster than the rate of inflation than common stock and real estate. You just need to be more careful with your stock and REIT investments than in the past. 

The next step is to allocate your capital accordingly. Most advisors will recommend that you take more risk at an earlier age. This is correct, but only to a certain extent. It doesn’t mean that you should go all-in on a small-cap biotech stock. Instead, you want to diversify your portfolio but with more capital allocation to risk than the middle-aged or senior investor. The breakdown depends on your current financial situation and future goals, but most investors like to keep speculative investments at around 5%. If you’re in your 20s and you’re comfortable with risk, then you can allocate 10% of your capital to speculative investments. The potential reward will be high, and if you’re wrong, then you have plenty of time to make it back with income generation. As stated earlier, dollar-cost averaging should be considered. You can also allocate some capital to fixed income, but at this age, this isn’t as important because you're generating income. (For more, see: Investing for Safety and Income: Tutorial.)

Buying on margin is something that should only be considered by extremely high-risk investors. When you buy on margin, you’re using leverage in attempt to magnify gains, but the downside risks are extreme. The real risk here is that most people in their 20s don’t have enough experience with investing, yet they’re certain they know better. This is a dangerous situation. If you’re incorrect with your predictions, you'll be faced with a margin call — you'll either have to deposit more money or sell some of your assets, potentially a car or a house. In other words, avoid using margin. By doing so, you will avoid unnecessary debt. (For more, see: How the SEC Regulates Buying on Margin.)

The big problem with margin is that even if your predictions are correct, the market can stay irrational longer than you can stay solvent. When you buy with cash (opposed to margin), you can wait forever for an investment to come back. Nobody can force you to do otherwise. When you buy on margin, there is a time limit.

Buying on margin isn’t the only high-risk investment to avoid.

Leveraged ETFs

To the average investor, leveraged ETFs look highly appealing. Why shouldn’t they? Your gains can be three times what they would be with a standard ETF. And it’s certainly possible to invest in a leveraged ETF that goes on a tear and delivers a significant return in a short period of time. (For more, read: Top 6 S&P 500 Leveraged ETFs.)

The problem is that leveraged ETFs always come with high expenses. The average expense ratio on an ETF is 0.46%. The average expense ratio on a leveraged ETF is 0.89%. This will cut into your profits and exacerbate your losses. Also, that 3x potential return is daily—not annually—and it's before fees and expenses. 

If you look at leveraged ETFs that have performed poorly for two years or more, almost all of them have suffered depreciation of more than 95%. This is horrific and should be avoided at all costs. Leveraged ETFs are for experienced traders and investors who have a good idea of where an index, commodity, or currency will be headed in the near future. (For more, see: Leveraged ETFs: Are They Right for You?)

Other Investment Dos

One of the best investments you can make: college. If you’re in your 20s and you haven’t gone to college, this isn't what you want to hear: A college degree is valuable. If you’re worried about cost, then go to a community college for the first two years. You can work at the same time to save money for when you transfer. Also, college courses are very different from high school classes. In college, you’re not forced to take a wide range of classes. Instead, you take courses you’re interested in, which makes learning enjoyable. It also leads to specialization in a certain area, which increases your value in the workplace, especially since high-skilled workers are more in demand today than they have been in the past. The same can’t be said for low-skilled workers. (For more, see: 6 Ways to Fund a College Education.)

Start saving for retirement as early as possible. For tax-free withdrawals in the future, look into a Roth IRA. In order to withdraw, you must have owned the Roth IRA for at least five years and be 59.5 years old. 

There’s another simple secret to building wealth that's highly effective and risk-free. Save 10% of every paycheck you earn. You must pay yourself before anyone else, including insurance companies, utility companies, and so on. If you consistently follow this approach, your wealth will build at a surprising rate. It doesn’t sound like a lot, but it adds up fast. Let’s say you’re 27 years old and your bi-weekly paycheck is approximately $1,350. That’s a $135 deposit into your savings every two weeks, which is $270 a month and $3,240 per year. Any 20-something in their right mind would take a guaranteed return of $3,240 per year. (For related reading, see: What Economic Factors Affect Savings Account Rates?)

The Bottom Line

We currently live in a dangerous economic environment. But if you implement dollar-cost averaging while allocating the majority of your capital to a DRIP with large-cap/resistant stocks and the rest (about 10%) to small-cap stocks, you will greatly reduce risk while allowing for the potential of impressive long-term returns. REITs are also a good way to invest in real estate without any headaches. Avoid margin and leveraged ETFs. Start putting money away early for retirement with a Roth IRA. And begin saving at least 10% of every paycheck. (For more, read: Retirement Planning for 30-Somethings.

Dan Moskowitz does not have any positions in AAPL, NFLX or TSLA. 

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