Best Investments For Young People

Since I am a young guy, age 30, I am often asked what the best investments are for young people who obviously have a strong desire to make as much money as they can.  It is always a tough question to answer because like my fellow young professionals, I have the immense desire to make as much money as I can as quickly as I can so that I can enjoy a good retirement and even a few toys today. Unfortunately, the answer isn’t always as simple as “invest in this stock and you will make 10,000%!” 

The Power of Compound Interest

I started to research investments back when I was 14 years of age and one of the first big lessons I learned was the power of compound interest.  With compound interest, and with the proper long term outlook of retirement, a little bit of money doing well will lead to a lot of money down the road.  Here is an example: If you are 25 years of age and you make $40,000 per year, if you are able to save just $4000 of your income every year until age 65, assuming a 10% return (which is how much the S&P 500 has returned on average), then at age 65, you will be sitting with a nest egg of $1,950,000!  Again, that assumes that as you get raises and promotions, you ONLY invest $4,000 per year.  If you merely increase your savings by 4% per year, then by age 65, you will be sitting on $3,000,000! It’s crazy to think that off of a starting salary of $40,000 per year, you could have several million dollars, isn’t it? Well, that’s the power of compound interest.  (See the chart and table below to see how fast the money grows at the end)

Age

Balance

36

$94,091

48

$389,388

60

$1,316,158

25

$4,400

37

$107,900

49

$432,727

61

$1,452,174

26

$9,240

38

$123,090

50

$480,400

62

$1,601,791

27

$14,564

39

$139,799

51

$532,840

63

$1,766,370

28

$20,420

40

$158,179

52

$590,524

64

$1,947,407

29

$26,862

41

$178,397

53

$653,976

 

 

30

$33,949

42

$200,636

54

$723,774

 

 

31

$41,744

43

$225,100

55

$800,551

 

 

32

$50,318

44

$252,010

56

$885,006

 

 

33

$59,750

45

$281,611

57

$977,907

 

 

34

$70,125

46

$314,172

58

$1,080,097

 

 

35

$81,537

47

$349,989

59

$1,192,507

 

 

 

As you can see in the graph above, even at age 50, only 15 years from retirement and 25 years after you started investing, you are still at around $500,000 and in the next 15 years, you make up another $1,500,000! The key is to be patient.  I don’t want you starting to invest and in 25 years say “That Paul Gabrail was wrong! I only have $500,000 and I have only 15 years left to retirement! What gives!?!?” What gives is compound interest…it will catch up as you can see in the chart and graph above.  Patience is key.

The Investment Strategy

So that’s all great and dandy, but the real question on your mind is, “What are good investments for young people like me?”  And that answer is a not very sexy but highly efficient answer: The best investments for young people are long term diversified Exchange Traded Funds (ETFs) or mutual funds with low expense ratios.  What are expense ratios you ask?  Good question. It’s something to pay attention to. It’s basically how much the fund or ETF will charge just to be managed and run.  Mutual fund companies tend to have higher expenses because they have research staffers that are looking for the best companies, or at least trying to. Unfortunately, most expense ratios can eat up 10-12% of your total return in a given year and over the long haul, that’s a big difference! Now, I am not opposed to expense ratios of course.  If the fund company can prove that they beat the market consistently by at least as big a margin as the expenses, then of course it would be worth paying that.  Unfortunately, most mutual funds do NOT beat the stock market on a yearly basis so why pay more to earn less?

Getting back to the point, though, is that the bottom line is you shouldn’t be trying to hit home runs.  Your goal should be to hit some solid singles and doubles and with a few diversified mutual funds and ETFs invested in several hundred companies, you won’t have to worry about any individual company taking a dive and potentially ruining a large chunk of your retirement. 

Is it sexy? Of course not, but what’s sexier than not having to worry about money during the last 25-35 years of your life?  That is the main goal in any long term retirement planning.

I personally own over 800 rental units and several businesses generating several revenue streams and I still save the same way I state above.  I am able to save over the 10% mark, but I have four ETFs that I purchase on a monthly basis with the money I automatically have taken out of my checking account.  I also have a retirement account that is invested in several mutual funds and bond funds to provide good stable long term growth that is better protected against massive drops in the market.  Is it sexy?  Nope! But I keep my eye on the prize: Retirement.

Best EFTs for Young People

So, what ETFs do I buy? Well, there are four main ones that I buy: SPY, SDY, VB, and MDY.

SPY is the S&P 500 ETF that tracks the stocks and returns of the S&P 500. This ETF has a low expense ratio of around 0.17% which is about 80% LOWER than the comparable mutual funds.  Why should I pay such a large fee on mutual funds when all they are doing is mimicking a broad based index like the S&P 500?  In addition to appreciation, this fund generates around 2% in dividends each year which I reinvest back into SPY.

SDY is an ETF that purchases stock in the top 50 dividend paying stocks that have a history of consistently increasing their dividend payouts in the S&P 500.  If you look at history, dividend paying companies tend to outperform non-dividend paying stocks by 2.5% or so.  Over a 40 year period, that could mean over a doubling of your money! That’s nothing to sneeze at or ignore, so I choose to go with historical records.  This ETF yields around 3.5% for the dividend which, again, I use to reinvest for my retirement.

VB is a great ETF that invests in smaller companies. Small companies have a lot of growth potential and with such a long term outlook in my retirement, I can afford to take a bit of risk, as can you, in smaller companies making big moves and jumping. 

MDY is the ETF I use for my mid-size company exposure. These are companies that aren’t as big as the S&P 500 companies, but are also bigger than small companies that may be a bit riskier. In any given year, large, mid-sized, and small companies can really perform well. During down markets, large cap stocks tend to do well since they are considered more secure, which is true. 

The good news is that no matter how much money you are starting with, whether it’s $3,000 or $30,000, there are several online brokerage companies that make it easy for you to start an account and only charge $8-$10 per trade.  This makes it affordable for ANYONE who wants to start investing for their retirement.  You can try www.Schwab.com or www.TDAmeritrade.com to get started.

Unfortunately, this kind of investing didn’t come from some cheat sheet book.  Why?  Because books that preach boring investing tend to not do well. But the boring investing is what you will need in order to better secure your financial future.  I am recommending to buy ETFs and Mutual funds…books are ALWAYS written about buying stocks, not about mutual funds or ETFs. 

Anyone can chase returns and promise the moon and the stars, but being patient and disciplined is the surest way to financial security.

For more articles and thoughts like this, follow me on Twitter @capmanifesto and subscribe to my RSS feed. Also, feel free to contact me with any questions or comments about the best investments for young people.   

8 Comments
  • Chris
    May 30, 2012

    Thanks for the ETF recommendations! I had been in SPY, but the other 3 are new to me. Looking forward to digging into them some more.

  • Paul Gabrail
    May 30, 2012

    Thanks Chris. Yeah, they are just a nice way to get into a very large # of companies without the hassles of individually researching them. Let me know what you think.

  • Aldric
    August 23, 2012

    Thanx for the tips Paul. I am a senior in college and looking for some secure alternatives to start investing/saving money. I will definitely look into mutual funds and ETF's

  • Paul Gabrail
    August 23, 2012

    Great Aldric! Thanks for commenting and please read my blog post on 401k and emergency funds as it definitely is geared towards your age group: young professionals soon to enter the workforce.

  • Kasey
    November 29, 2012

    Paul, Thanks for the tips. I am a junior working my way through college and just now realizing how important my futre is. I wont have much to invest, about $500 at most, but is the Mutual Fund and/or ETF idea still a good idea for me or is there something else you would suggest?

  • Paul Gabrail
    November 29, 2012

    Kasey, Thank you for the comment. First off, I am NOT a registered investment adviser, so keep in mind that I am speaking from my experience and what I do for myself. $500 is not a lot, but it's a great start. You can still purchase mutual funds and ETFs, although some mutual funds have minimums of $1000 or so. So maybe an ETF, which is like a share of stock, being purchased through a low cost brokerage would be a great plan for you. Pick one where you don't have to jump in and out of so that you can make sure that your cost of buying the ETF is not repeating over and over. Then, start saving by automatically withdrawing from your account each month like a bill. You will be shocked to see where it is in 40 years. Sounds like a long time, I know, but secure retirement is given to those who are patient and diligent.

  • Kasey
    December 3, 2012

    Thanks again brother,
    God bless

  • Mike
    February 19, 2013

    Hi Paul,
    You're offering a lot of great advice that I will definitely utilize. I had one question, and I'm not sure if it is completely related to this topic. I'm a new teacher and have a pretty tight budget but I think I could put up $2000 initially and put in about $200 monthly thereafter. Should I look to an IRA/Roth IRA or ETF/mutual fund?

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