What are the best investments for young adults? Although there is no one-size-fits-all investment strategy, mutual funds offer young investors one of the best investment types.
Learn why mutual funds can be a good investment for young and novice investors and which mutual funds are best for investors in their 20s and 30s.
Key Takeaways
- Young investors might not know what stocks or industries to invest in, making mutual funds ideal since they hold many securities.
- Many mutual funds provide diversification, which helps the fund reduce the risk of loss.
- Those in their 20s looking to build a portfolio should consider index funds, which are funds that track an index such as the S&P 500.
- For young investors saving for retirement, target-date mutual funds invest in a mix of stocks, bonds, and cash that assumes a person invests until a specific year.
- Watch out for mutual fund fees and commissions. "No-load funds" may not charge sales load but may charge other expenses.
Why Mutual Funds Are Best for Young Investors
A mutual fund is an investment that contains a basket of securities. Investors buy into the fund by pooling their money. The fund could contain stocks, bonds, or a mixture of investments and it's usually managed by an investment manager. The fund might track an underlying index, such as the , or it could be designed to invest in a select number of stocks or securities, such as technology or bank stocks.
Mutual funds are not just for beginners or young people. They are used by professional money managers and expert investors around the world. Below are the primary reasons mutual funds can be an ideal investment for those in their 20s or beginning investors:
Simplicity
Most investors in their 20s and 30s don't have complex financial needs. Mutual funds are easy to research and buy. Many brokers offer various funds and the ability to establish an automatic direct deposit from your payroll each pay period to buy shares of the fund. This makes them a good choice for young investors.
Diversification
As a young, novice investor, you might not know what stocks or industries to invest in, which makes mutual funds ideal since they hold dozens or hundreds of securities. A young investor can get started and do well with just one or two funds.
Many mutual funds provide diversification, which helps the fund to reduce the risk of loss. For example, if one company's stock performs poorly, the other stocks might not decline, providing a type of hedge against market risk. However, there is always the risk of loss with mutual funds as with many other investments.
Accessibility
Typically, young people in their 20s don't make a high income during the first several years of employment. Mutual funds don't require a huge upfront cost to get started and there are many low-cost funds that don't require a financial advisor to purchase. However, you'll likely need to establish an account with a broker, which is relatively painless.
Note
Fidelity has some index funds that require no minimum investment, have no minimums to open an account, and charge a zero expense ratio.
Investment Goals in Your 20s
When you are in your 20s, it's helpful to determine your financial plan and investment goals and whether you're investing for the short-term or long-term.
Budget
It's important to establish a budget with your monthly income and expenses. Your budget can help you get started in determining how much you can afford to invest.
Emergency Fund
Some of your short and long-term goals might include creating an emergency fund. A savings account or money market account can hold the cash allocated to your emergency fund. This money can be used for those unexpected expenses such as a car repair, loss of job, or medical expenses.
Major Life Expenses
Your major life expenses over the next five to ten years might include purchasing a house or starting a family. A home is one of the biggest investments that you can buy. Calculate how many years from now you want to own a home or start a family and start saving early for the downpayment, which is typically 10% to 20% of a home's purchase price.
Compounding
Compound interest is the process of earning interest on your investment gains or interest. Compounding benefits the young since you have many years to reinvest your market gains, which can build long-term wealth.
401(k) Employer Match
If available, sign up for a retirement plan or 401(k) through your employer. These employer-sponsored plans may match your contributions up to a certain percentage of your salary. For example, you might be required to contribute 5% of your salary in order to qualify for a 5% match from your employer.
Best Fund Types for Investors in Their 20s and 30s
If young investors are saving for a long-term goal, such as retirement, there is likely a time horizon of up to 30 years or more. All investors should be aware of their own investment objectives and risk tolerance. But the longer you have until you need your money, the more aggressively you can invest.
Here are the basic types of funds that young investors are wise to consider:
Target Date Mutual Funds
As the name suggests, target-date mutual funds invest in a mix of stocks, bonds, and cash that assumes a person invests until a certain year. As the target date nears, the fund manager will slowly decrease market risk by shifting assets out of stocks and into bonds and cash. This is what an individual investor would do themselves. Therefore, target-date mutual funds are a type of "set it and forget it" investment.
For example, if you are saving for retirement and think you may retire around the year 2045, you may consider a 2045 target date fund such as Vanguard Target Retirement 2045 (VTIVX).
As of May 31, 2022, the fund had 86.42% of its assets in stocks, including international equities, and nearly 13% in bonds. This investment skews more towards bonds and away from stocks as the target date approaches. The minimum investment required for this fund is $1,000, and it charges an expense ratio of 0.08%. Vanguard says this fund could be an option for those "planning to retire between 2043 and 2047."
Note
Sometimes, target date funds invest in other mutual funds, and both funds charge fees. That makes the target date fund more expensive. Higher expenses impact fund returns.
Balanced Funds
Balanced funds are also called "hybrid funds" or "asset allocation funds." They are mutual funds that invest in a balanced asset allocation of stocks, bonds, and cash. The allocation usually remains fixed and employs a stated investment objective or style.
For example, as of May 31, 2022, Fidelity Balanced Fund (FBALX) had a portfolio of nearly 68% stocks and 31% bonds. The fund is considered a medium-risk or moderate portfolio and had a .51% expense ratio as of Oct. 30, 2021.
Index Funds
Those in their 20s looking to invest or build a portfolio should consider index funds, which are mutual funds that passively track the composition and performance of an index such as the S&P 500.
Index funds are great for young investors since they provide a broad exposure to equities and have low expense ratios. These funds can expose you to dozens or hundreds of stocks from various industries in just one fund, providing a low-cost, diversified mutual fund.
For example, the Schwab S&P 500 Index Fund (SWPPX) tracks the returns of the S&P 500 index, meaning the fund mirrors the holdings of the S&P 500. As of May 31, 2022, the fund's three-year annualized return of more than 18% was nearly identical to the S&P 500 index. The fund has no investment minimum and an expense ratio of 0.02%.
Where Young Investors Can Buy Mutual Funds
Assuming they are at least age 18, any investor can buy mutual funds through virtually any fund company or brokerage firm that offers them. Most online brokerages have no account minimums for their mutual funds.
Also, 401(k) plans typically invest in mutual funds. So, it's important to check with your employer to see if they offer a retirement plan and an employer match, but also explore the tax benefits that might be available.
Young people who want to build an investment portfolio without a financial advisor could invest in a no-load mutual fund company. "No-load" funds do not charge commissions. You only pay them if you use a broker.
Note
“No-load funds” may not charge sales load, but they could still impose other fees or expenses.
The Bottom Line
Young investors or those just starting to build an investment portfolio might not know which stocks, bonds, or investments to buy. Mutual funds can help by providing broad exposure to many stocks and industries. Since mutual funds often hold dozens or hundreds of securities, they can diversify your risk of market losses.
Index funds, which track an underlying index such as the S&P 500, are popular choices for their simplicity, low fees, and low investment minimums. As with any investment, there is the risk of loss, and young investors should be aware that some funds charge fees and commissions.
Frequently Asked Questions
What investments should I make in my 20s?
Mutual funds can provide young investors access to many stocks across various industries. Index funds, for example, track an underlying index such as the S&P 500, providing broad exposure to the market.
Is it worth investing in your 20s?
Starting early can help young people in their 20s build wealth, even if you're only investing small amounts of money to start. Your investments can grow over time, particularly if the money is invested in funds that provide access to the equity and bond markets.
What are some investing strategies for your 20s?
If you're aggressive, mutual funds that hold growth stocks can be an option. For those with a long-term financial goal, such as retirement, target-date funds match the investment portfolio with your age, meaning it's aggressive when you're young and more conservative as you approach retirement.
