How to Invest for Growth and Safety in Your 20s and 30s
By: Anthony Carlton
Tags: Personal Finance, Investing, Advice, Money, Finance

Part One — Cash

The quiet hero of your investing strategy is cash. However, you may not think of cash as an investment. It doesn’t make money while you sleep, and it’s boring to talk about compared to Bitcoin or Tesla.

But without cash, you’d have a tough time building wealth or reaching financial freedom.

A trip to the emergency room, leaky roof, or sick pet is all it takes to go from savvy investor to cashless, in credit card debt and withdrawing money from your 401(k).

Minor expenses grow into bigger problems when you don’t have the cash to cover, throwing you off track with your goals and causing financial stress.

The bad shit will happen. There’s no way around that. But financial stress is avoidable with a little planning.

How much cash should you keep in an emergency fund?

As a rule of thumb: aim to have $1000 in high yield savings account before getting serious about investing. If you’re not married, don’t have kids, and don’t have a mortgage — $1000 will cover most emergencies at this point in life.

If you’ve already saved $1000, then build up to 3–6 times your monthly income for a full emergency fund.

Part Two — Retirement Money

Your ticket out of the rat race. You’ll want this money to at least maintain your lifestyle in the future when you no longer get a paycheck.

The smarter you are about growing this part of your portfolio when you’re in your 20s and 30s — the less you need to save out of your own pocket for a comfortable retirement. All thanks to the magic of compounding.

But first, the investments that *don’t* belong in this part of your portfolio.

Trading individual stocks

Buying a bunch of crypto

Flipping your first fixer-upper

Learning how to trade options

Going all-in with your employer’s stock-buying program

Using retirement money for this stuff is like gambling with your future rent money. These high-risk, high-reward investments belong in the “moonshot” part of your portfolio.

With retirement money — the largest percentage of the pie — keep it simple.

That doesn’t mean play it safe and skip out on long-term growth. It means your strategy should be boring and aligned with timeless investing principles that work.

Which timeless principles?

Diversification — reducing the risk of losing money by investing in a variety of assets

Passive investing — using index funds and ETFs to match the overall stock market’s performance instead of trying to beat it

Buy-and-hold — investing for the long term and avoiding the temptation to try to time the market’s random ups and downs

Minimizing taxes & fees — the nearly invisible termite that can eat up your investment gains if you’re not careful

Dollar-cost averaging — smoothing out the ups and downs of the stock market over time by investing a set amount on a fixed schedule (e.g., $100 every two weeks)

Okay, but where? Where should I invest my retirement money?

If your employer offers a retirement plan, it’s generally a good idea to start there. Contributing at least enough to get the full employer match is a no-brainer.

Putting 10–15% of your paycheck towards retirement (or working your way up to that point) will give you an even better chance of having everything you need in retirement.

If you don’t have a retirement plan at work or want to invest alongside your employer’s plan, a simple way to accomplish this is with a robo advisor.

Whether you’re a beginner or just short on time, a robo advisor checks all of the “core principle” boxes above without much time or effort.

I’m a big fan of Wealthfront and Acorns, but you’ll find plenty of options by googling best robo advisors 2020, for example.

Part Three — Moonshots

I’ll admit, I don’t trade stocks or follow the latest crypto news. I used to. But ironically, as I became busier, helping others manage their money, I had less time to actively manage my own.

So if you’re like me — a lazy investor content with putting all of your long-term money into the hands (err, code?) of robo advisors — you’ll be just fine with the boring, low-cost index funds and ETFs this option gives you.

But, if you want to make calculated bets in hopes of winning big with one or two investments over the long run (basically the strategy of VC).

Let’s talk about Moonshot investments.

A moonshot is a concept I’m borrowing from Google. The tech giant invests a relatively small amount of capital in high risk, high reward projects. Some of the winners to come out of Google’s Moonshot Factory so far include;

Waymo (self-driving car technology)

Google Glass (wearable computers)

Loon (balloons providing internet connection to rural areas)

Wing (autonomous delivery drones)

In general, moonshot investments are high risk, high reward, and more likely to fail than not. But if you want to trade stocks or dabble in crypto — this is the part of your portfolio to do it with.

A rule of thumb to help you navigate moonshot investments: don’t put more than 20% of your total investments in moonshots at any given time. Lean closer to 10% if you’re a beginner.

In other words, don’t invest any amount of money in moonshots that you aren’t willing to lose completely.

What constitutes a moonshot over retirement money?

While not an exhaustive list, I’d consider anything below to be high-risk, high-reward.

Cryptocurrency

Concentrated bets on individual stocks

Buying a fixer-upper house to flip for profit

Angel investing or owning stock in the startup you work for

Leaving your 9–5 for an unproven and untested business idea

As another rule of thumb and piece of somewhat common sense: stay away from using leverage, or other people’s money, to fund your moonshot investments.

Yes, I’m talking about trading options, unless you’re in the 1% who knows that game well.

Anything that looks or feels like day-trading doesn’t even fall in the category of investing in my mind.