As a young person, what you’re trying to do is prepare for your future. You’re trying to accumulate enough assets so that when you’re unable or unwilling to work in the future, you can have a steady cash flow coming back to you. What you want to do is invest. Economic power often leads to military power, which in turn leads to political power.
When you think of investing, you should consider the four primary types of assets:
- Real estate.
Real estate, for example, can be especially useful in a zombie apocalypse, as owning a home and having a few guns and some food can help you ride things out. Many advisors recommend holding up to 5-10% of your assets in gold, as it has historically been a store of value and a medium of exchange for the last five thousand years. There are ways to buy gold without buying the actual bullion, but if the grid shuts down and there’s no communication, you will not have it on your person. Many people like to buy gold coins, bars, or something in the physical, tangible form and hide it in their house, where it is safe. Others might hide it in air-conditioning ducts or something like that.
Bonds are something you don’t really want to be involved with at your age. Bonds may be for people approaching retirement who want to buy a bond because it’s a contract that you’re going to get your money back and get a stream of interest payments along the way. The big risk is inflation and interest rates. When interest rates go higher, bond prices go down, and when inflation goes up, the value of the money you’re getting back from that bond is going down.
You’ve got to pay your student loans first. That’s kind of like a non-negotiable. You got to pay your rent, pay for food, and be young and social. Right now is probably the best time to refinance student loans because you’re not going to see interest rates much lower. They can’t be much lower than they are right now.
Avoiding The Biggest Investing Mistakes
You should never start with the return you want and just pull a number out of thin air. You should say, ‘In 10 years, I would like to be able to afford a $300,000 house in because of certain reasons. So, if you know that’s what you’re saving for, then you work backwards. So we have the following mistakes to avoid.
1. Not having clear defined goals
The biggest mistake the average investor is making is not having a definitive, well-thought-out answer to the question, ‘Why am I investing in the first place?’ Once you start defining your goals, an interesting thing happens. You start to realize that you don’t need to take the maximum amount of risk to hit them, especially if your goals have a lot of time in order for you to get there.
Understanding what you want, what you want your money to grow into, and what you’ll be spending it on, and then working backwards is a better way to come up with a portfolio than just starting and letting see what happens.
2. Not investing according to plan
What’s the down payment that we’re working toward? Okay, great, that’s the number. So, how do I get to that number? What portfolio mix gives me the optimal chance of success, understanding that there will be drawdowns along the way? Understanding that there will be volatility. Once you know your number, then you have to ask yourself, is this realistic? If the number you arrive at is, I need to make 12% a year, and I tell you that the market on average delivers 8%, the stock market and bonds are more like 3%, and then I tell you inflation is a factor, well, then you say, okay, I don’t think I can earn 11% after inflation. And so, that becomes a question of am I saving enough?
There are a lot of different levers that you can pull as an investor to hit these goals, but you have to know what they are. The alternative is you’re throwing your money at mutual funds with very little understanding of what role they’re playing in your life and what they’re trying to accomplish. So, we talk about goals-based financial planning first. We never talk about a portfolio with an investor until we know the why - what are you trying to do?
Hope this goes along way into helping you.