Why ETFs are one of the best investments for young people
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It is never too early to start taking steps to improve your finances, especially if you are a student or recent graduate with an entry-level job.
Many financial experts recommend that you start investing as early as possible because the sooner you start, the more time your money has to grow and the less you will need to contribute. For example, a 25-year-old only needs to invest $ 240 per month with an annual return of 9% to be $ 1 million at 65; but if they only wait five years to start investing at 30, they will have to invest $ 370 per month.
There are many types of investments that meet a variety of needs, but Certified Financial Planner Katelyn Bombardiere says ETFs are one of the best investments for students and young professionals.
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An ETF (exchange-traded fund) is like a bucket that contains a collection of securities like stocks and bonds. You can invest in an ETF the same way you would invest in a stock, buying a stock through a brokerage house. But unlike stocks, when you buy a stock in an ETF, your money is spread across different investments rather than just one company.
Bombardiere recommends ETFs as an investment for young people for two good reasons: they aren’t as expensive to own as some other assets like mutual funds, and they offer diversification.
“People focus on making money fast rather than focusing on ETFs, which aren’t sexy, but they’re well diversified and inexpensive,” she says.
A low cost means that more of your money will be spent growing your wealth, rather than paying a fee to invest in the fund. You can determine how much it costs to own an ETF by looking at the expense ratio. This number is usually expressed as a decimal and represents the amount you’ll pay for every $ 10,000 you invest in the ETF.
The other factor that makes ETFs so attractive – diversification – should be an important part of any investor’s wealth building strategy. When you diversify your portfolio, you are spreading your risk rather than betting all your money on a stock that could end up collapsing.
“ETFs are great for students and young professionals who don’t have a lot of money to invest in a bunch of different investments,” explains Bombardière. “If they only have $ 100 and they invest it in a stock and it accumulates, that’s not good. So it’s best to create an ETF that gives them more exposure. to a bunch of different actions. ”
That’s not to say that you shouldn’t invest in stocks at all – they should instead be part of your overall investment portfolio.
“People want to try and pick the next Amazon or the next Tesla, and it’s almost impossible,” Bombardiere said. “People devote their entire careers to this. ETFs are better if you set them up and forget about them and let your money work for you. “
A big misconception about investing is that you must already have a lot of money to get started. However, starting small is more beneficial than not investing at all. In fact, starting with small amounts of money – like $ 5 or $ 10 – as a beginner can help you become more familiar with how the market works. Then over time you can invest more and grow your portfolio.
“Better to start than not to start,” says Bombardière. “Invest with $ 10 or $ 20 per month. And as you earn more money and increase your budget, you can increase your contributions. “
You may also want to consider using an app that makes it easier than ever to invest small, non-intimidating amounts. Acorns, for example, allow users to invest the “spare currency” they accumulate when making daily purchases like coffee, textbooks, and clothing – purchases they would have to make anyway. way. In this way, they are essentially investing on autopilot. (Disclosure: NBCUniversal and Comcast are investors in Acorns.)
Other apps like Robinhood allow you to invest in fractional shares – a part of a stock based on how much money you want to invest rather than how many shares you want to buy – with also little as $ 1. Split actions can be a big deal if you can’t afford a full share of an action yet but still want to get some skin in the game.
At the end of the line
ETFs can be an attractive investment option for students and young people at the start of their careers due to their diversification and low cost. It’s also important to remember that you don’t need to have a lot of money already before you start investing. You can start with what you can comfortably afford and work your way up from there.
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Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.