How Young Investors Can Get Started

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Thus, the amount you should invest in, for example, risky stocks is driven partly by your personality, Jorie Johnson says. Lately, investors have gotten a taste of just how bad conditions can get. "The last six months have been a good test of risk-tolerance," Oliver says. If you can't sleep at night when your nest egg loses 40% of its value, a more conservative portfolio—for example, more bonds and less stocks—may help. Engelman, for example, admits equity investing doesn't fit his personality. For him, he says, "there's something intrinsically unreliable about it."

6. Equities are risky. Equities, or stocks, do better than most other investments over the long term. The problem is that equities sometimes go through long periods—the 1930s, the 1970s, the past decade—when values barely budge and even fall substantially. That has sparked debate over how appropriate it is to risk retirement funds in the stock market, and, if so, what portion of a portfolio should consist of these risky assets.

Any amount of money you need soon, i.e., in the next 5 or 10 years, should not be in stocks, advisers say. Even a decade is too short of a period for some conservative investors.

Young people have an advantage here because they have longer until retirement. Jordan says he doesn't mind betting on stocks because "while I'm young, I still have time to recover those losses." For young people in their 20s, 50% or more of a 401(k) or other retirement plan could go into equities. But, says Aiken: "the key is not time period, but the resiliency of their ability to earn income." Young people have decades to earn back money lost in bad years like 2008.

The classic antidote to the riskiness of equities is bonds. However, that didn't work last year. Funds based on U.S. Treasuries—safe government debt—saw outsize gains, while corporate bond funds registered huge losses. "A lot of people got caught by surprise," Jorie Johnson said. Bonds may return to their calmer behavior eventually, but in the meantime bank certificates of deposits and Treasury inflation-protected securities (TIPS) are other safe alternatives.

7. Get started. Retirement can feel like a long time in the future, but money invested now can compound year after year. "Compounding is a very powerful thing," Oliver says. "Even if it's just a small amount, time is your biggest ally." Also, young investors can learn and even make mistakes while the stakes are still low, Hogan says. Almost all experts advise clients to take full advantage of an employer that matches retirement contributions. Doing otherwise is leaving money on the table. Jorie Johnson advises saving 10% of your income no matter what. Get started now, because while your income may rise in the future, so will your responsibilities and spending, she says.

8. Do everything. "It's important to do everything," Jorie Johnson says. This means you've got to juggle it all, financially: pay down debt while saving for both short-term and long-term needs. "You have to make sure that every month you're putting money aside for each goal," she adds. Without that balanced approach, you're likely to focus on one goal—like buying a house—and never meet the others—like setting up an emergency fund or saving for retirement.

9. Be flexible. Timineri, who advocates setting aside a larger-than-usual cash reserve, says the financial crisis and stock market collapse have changed the rules for investors. "I don't have the faith that I used to have [in the financial system]," he says. For now, he's allocating a maximum of only 50% of portfolios to stocks, and telling clients to wait before making any major moves. "No one thinks this is going to be over in a couple months," he says. In other words, this may not be the time to set up a financial plan that you stick with for life. A little caution and flexibility may be warranted for the time being.

10. Can you save and invest too much? It's rare that young people can set aside too much money for the future, advisers say. More often, clients need to be reminded of the risks of saving too little. "If you don't save [a certain] amount, you're never going to be able to stop working," Aiken tells clients. "That often motivates them."

But how do you balance your present happiness with future needs? Bob Smrekar of Wade Financial Group in Minneapolis says some clients save very aggressively, living a lean lifestyle because they want to retire by age 55. "If that's what their goals are and that's what they want to do, more power to them," he says. Other of his clients prefer to travel while they're young and healthy, even if they're well aware that expensive trips may delay their retirement.

Obviously, advisers say, it makes sense to spend now on college or graduate school. Even if it delays the start of your retirement investing, another educational degree could add substantially to your income over a lifetime. "Your life today is just as important as your life in retirement," Oliver says. "But the difference is you're not going to have some earned income in retirement. It's all about that trade-off."

With each paycheck, young investors must weigh a variety of goals, for the present and into the future, against each other. It's a balancing act made even more difficult by these unstable times.

Steverman is a reporter for BusinessWeek's Investing channel.