How should young adults begin investing?

The sooner you begin to invest, the more you can benefit from the compounding effect, and the more likely you can ride out the waves in the market and the economy in general. 

We asked Riley Adams, CPA, who runs the Youngandtheinvested.com blog, the young people’s guide to investing for his advice to young adults thinking about investing. 

"Young adults should invest in stocks as a long-term investment strategy since they offer a higher return to begin compounding at a higher rate sooner. They should keep in mind that the market fluctuates, so there will be periods when stocks go up or down. Further, stocks also face a high correlation to recessions, meaning that even if the stock market does well for years on end, investors could still lose money because of economic hardship. 

 

Investing in stocks is generally riskier than other investments like bonds, though they generally work out favourably with young adults who have decades until retirement (30+ years) and invest in a broadly-diversified portfolio. Investing well is imperative for success later on down the road and patience can lead to big returns; once you're ready to begin contributing toward your long-term savings.”

What if you are in your early 20s and want to get started on investing? Here's what Riley Adams thinks: 

"Go for the long term and prioritize stocks. You can afford to take on more risk now in your early 20s because you have plenty of time and experience ahead to recover from any mistakes you make. It's ideal to invest more aggressively, with a larger proportion going into riskier investments like stocks. The stock market has historically been one of the best vehicles for investment available to individuals who want to access a cheap way to compound returns over many years."

 

Riley also talked about the factors that a young adult should consider when choosing between different individual retirement and savings plans, such ISAs, RSAs, IRAs, ESAs. 

"Taxes, income level and available investment options. I can't comment beyond IRAs as I'm not well-versed in any of the other account types. IRAs come in two primary types: Traditional and Roth. The former allows you to make pretax contributions, lowering your taxable income now and paying taxes in retirement while the latter allows you to pay taxes now and have tax-free growth for life.

Which one makes sense for you depends on your tax situation and whether you expect to pay higher tax rates now or in retirement. If you expect to pay more taxes now, you want to contribute to a traditional IRA. Conversely, if you expect to have higher tax rates in retirement, a Roth IRA is best for you."