As they’re just starting out, early career accumulators—loosely defined as people in their 20s and 30s—don’t typically have much in the way of financial capital.
But early career accumulators have other assets that their older counterparts can look upon with envy. With a whole lifetime of earnings stretching before them, early career people are long on what investment researchers call human capital: Their ability to earn a living is their greatest asset by a mile.
Investors in their 20s and 30s have a valuable asset when it comes to investing, too: With a very long-time horizon until they’ll need to begin withdrawing their money (for retirement, at least), early career investors can better harness the power of compound interest. They can also tolerate higher-volatility investments that, over long periods of time, are apt to generate higher returns than safer investments.
If you’re just embarking on your investment journey, it’s hard to go too far wrong by investing as much as you can on a regular basis and sticking with very basic, well-diversified investments. But it also pays to think of your “investments” in a broad sense.
1) DEBT: Put it in its place.
One of the earliest forks in the road that many early accumulators face once they begin earning is whether to debt or to invest in the market. If it’s high-interest-rate credit card or student loan debt that features a particularly high rate, it’s worthwhile to earmark the bulk of one’s extra cash to clearing that. The reason is that it’s impossible to earn a high guaranteed return from any portfolio investment today, whereas retiring debt delivers a guaranteed payoff that’s equal to your interest rate. As a general rule of thumb, focus on paying down loans before moving full steam into investing in the market.
Exception: building an emergency fund.
2) SAFETY NET: Build one.
With limited financial capital, it’s essential that young accumulators protect what they have and be able to cover financial emergencies should they arise.
An emergency is an essential cash cushion to keep you from having to resort to unattractive forms of financing like credit cards or raiding your investments or borrowing from family/friends if you lose your job or encounter a surprise expense. While the rule of thumb of stashing three to six months’ worth of living expenses in cash might seem daunting, remember it’s three to six months’ worth of essential living expenses, not income.
Consider setting a higher savings target if you are a freelancer and your cash flows are lumpy.
3) HUMAN CAPITAL: Invest in it.
The 20s and 30s are also the ideal life stage to make investments in your own human capital—obtaining additional education or training to improve your earnings power over your lifetime. Of course, not every such investment pays off, and it’s ideal if you can get your employer to shoulder at least some of the financing. But if you have considered an advanced degree or extra training of any kind, the earlier you get started, the higher your lifetime return on your outlay is apt to be.
4) RETIREMENT SAVINGS: Kickstart it; it's never too early.
There are a lot of reasons that early accumulators put off saving for retirement. Repayment of education loans, down payment for home, buying a car, saving for the wedding, new-born child expense, and so on. Psychology is also in the mix: With retirement three or four decades into the future, people who are just embarking on their working careers may be hard-pressed to feel a sense of urgency in saving for it.
Yet, the youngest investors have the longest time to benefit from compounding, and that benefit accrues even if they’re only able to save fairly small sums and the market gods serve up “meh” returns over their time horizons.
The 22-year-old who invests just ₹2,000 today and starts investing ₹2,000/month for 40 years, will accumulate over ₹70 lakh at the end of this period. This is assuming that the money is not withdrawn and left to compound at a return of 8% per annum.
Let’s say she starts investing 10 years later at 32. The investment drops to little over ₹30 lakh.
Those first 10 years of missed compounding underscore the virtue of getting started on retirement saving as soon as you can, even if it means starting small.
5) ASSET ALLOCATION: Never to be ignored.
Early career accumulators have high risk capacities because they won’t likely need their money for many years to come. That’s why retirement portfolios usually feature ample weightings in stock investments: Even though they feature sharper ups and downs than safer securities like bonds and cash, stocks have historically rewarded their long-term investors with better returns than other asset classes.
On the other hand, if you’re investing for shorter-term goals—such as a home down payment, you probably don’t want to have much, if anything, in stocks. Yes, the returns from bonds and cash are apt to be much lower, but they’re also much less likely to encounter big swings to the downside. Portfolios for near-term goals might include a dash of stocks for growth potential, but the bulk of your money for such goals should be in safer, lower-returning assets.
Don't venture into overly narrow investment types, such as thematic funds or sector funds. Focus on broadly diversified investments. If you are unsure but want to get started, look at index mutual funds. Such funds track a segment of the market, such as the Sensex or Nifty, rather than trying to beat it. That may sound uninspired—and uninspiring. But broad-market index funds often have the virtue of very low costs, which can give them a leg up on actively managed funds over time.
Read More: Back To Basics
