How Young Investors Can Get Started

It's a bewildering time to begin saving for retirement. BusinessWeek asked financial advisers for words of wisdom for the young investor

By Ben Steverman

Two 22-year-olds are just starting their careers and beginning to save and invest. One devotes half his salary to quickly paying off student loans, with the goal of saving money to travel the world. The other dabbles in stocks, while planning to buy a home. Which one is starting out on the right foot? Neither? Both?

Learning to invest is hard enough. Now try doing it during the worst recession in a generation and the biggest financial crisis in a lifetime. If you're a young person with money to invest, however, you can consider yourself lucky. You have income at a time when the jobless rate is rising rapidly. If you're just starting out, you avoided—so far—huge losses of the sort that drastically changed the retirement plans of many baby boomer parents.

But even entry-level investors can benefit from planning for retirement, as far-off as that seems. A good start to saving and investing makes building a substantial nest egg for late in life much less daunting.

No Easy Answers

The current environment naturally leaves a beginner confused about how to invest. The tough housing market means real estate looks cheap, but it's also an unreliable investment. After the financial market's problems of the past year, the same can be said for stocks, bonds, and other investments. Are they a bargain or a dangerous trap? At the same time, the financial crisis and widespread layoffs seem to argue for playing it safe. But how much cash can really fit into your piggybank or under your mattress?

BusinessWeek asked experienced financial advisers for some advice to young investors. Experts don't always agree, but all agreed on one piece of wisdom: There is no easy answer. The right investing plan depends on your personality and your short-term and long-term goals, advisers say. Consider the two young investors mentioned above. On the surface, they're similar, but they're going about saving and investing very differently.

Alex Engelman is 22 and works at a market strategy consulting firm near Burlington, Vt. He distrusts the stock market and doesn't plan to buy a home anytime soon. "I'm all about mobility in my 20s," he says. Instead, Engelman plows half of his income toward one goal—paying off student loans that once totaled more than $20,000. "I don't want debt hanging over my shoulder," he says. When the loans are paid off—before the end of the year—he'll start saving cash so he can pack up and travel.

Robin Jordan, also 22, works in marketing at a retirement planning firm in Santa Barbara, Calif. He doesn't plan to move away anytime soon and is seriously considering buying real estate. "The rent I'm paying right now to live in downtown Santa Barbara is more than the monthly payment on my parents' mortgage in Northern California," he says. "I look at home ownership more as an investment than as a lifelong commitment," he adds. Meanwhile, Jordan is also starting to dabble in stock investing—setting aside 20% to 30% of his savings to buy individual stocks and a further 50% for broad index funds. He's trying to diversify his portfolio, but has noticed that's hard to do because many funds require minimum contributions.

Both young men may be pursuing plans that are perfect for their particular circumstances. There are, however, some general principles of investing and saving that it pays to be aware of. Advisers offer these tips:

1. Cash, cash, cash Both Engelman and Jordan said they're not yet saving much cash from month to month. However, nearly every financial planner will tell clients the first priority is an emergency cash fund. Before you can invest for the long term, you need enough to cover your current needs, they say. It's important not just if you lose your job, but for covering any eventuality from a major car repair or moving expenses to a pet's—or your own—surgery. For years, many clients resisted this advice, says Leisa Brown Aiken of Timothy Financial Counsel in Chicago.