5 Basic Investing Principles

Investing can be a great way to build wealth as a young adult. However, if you don’t know anything about stocks or bonds, you may be tempted to avoid investing altogether. This could be a big mistake, as you could miss out on the chance to earn big returns. These tips can help you get started investing, as an early start can make all the difference to your net worth.

Ask a financial advisor about the best way to begin investing based on your long-term financial goals.

5 Basic Investing Principles

1. Be Safe

It’s important to take stock of your financial situation. You don’t want to tie up next month’s rent in a bond you can’t access for 10 years.

For this reason, it’s a good idea to keep other types of accounts, such as a savings account, a checking account and an emergency fund, separate from your investment portfolio.

2. Know Your Style

It’s wise to know not just where your personal finances stand, but also the type of investor you are.

In general, there are three types of investors.

• Active investors
• Involved investors
• Passive investors

More active investors may like to pick the companies they invest in. Meanwhile, more passive investors may want to pick low-fee mutual funds instead.

Related Article: Investing for Beginners

3. Evaluate Your Options

Take the time to thoroughly research your investment options before you start investing. The more you know, the better off you’ll be.

It’s a good idea to track how each investment aligns with your overall strategy. This will help you determine whether you need to make adjustments to better suit your risk tolerance.

Keep in mind that past performance doesn’t dictate an asset’s future performance. There are plenty of resources like books, newspaper columns and blog posts that can help you choose the best securities. You can even join an investment club or organization.

4. Diversify

We have all heard it before – “Don’t put all your eggs in one basket.” It may seem outdated, but it still applies to investing today.

Keeping all your funds in a single stock or type of stock can be dangerous. That’s why diversifying your portfolio is key.

By adjusting your asset allocation and spreading your investments among stocks, bonds and other securities, you can successfully lower your risk exposure.

Try out our asset allocation calculator.

5. Expect Some Volatility

Investing doesn’t come with guarantees. There will inevitably be fluctuations in your securities’ values.

However, panicking won’t help you. You can’t let the market’s daily changes affect your emotions or investment decisions.

If the idea of picking winners is too daunting for you, consider an index fund that tracks the overall market. This way, you won’t have to research every single stock or bond you invest in.

How to Open an Investment Account

Before putting any of these principles into practice, you first need an investment account.

For most young adults, this means choosing between three options.

• 401(k)
• Roth IRA
• Taxable brokerage account

401(k)

If your employer offers a 401(k) match, contribute at least enough to capture the full match.

Employer matches are free money. This means passing them up means leaving part of your compensation on the table.

Roth IRA

Once you capture the full match, a Roth IRA is typically the next best option for young adults. This is because contributions are made with after-tax dollars, and all future growth is tax-free.

The 2026 Roth IRA contribution limit is $7,500, or $8,600 for individuals age 50 and older. ¹

To open a new account, you must provide some basic information.

• Social Security number
• A government-issued ID
• Bank account information
• Basic employment details

Taxable brokerage account

The best brokerages have no account minimums and can be set up entirely online in under 30 minutes.

If you want a hands-off experience, a robo-advisor may be a better fit. Options like Betterment or Wealthfront automatically build and rebalance a diversified portfolio based on your age and risk tolerance.

This is typically for an annual fee of around 0.25% of your balance. ²

Self-directed brokerage account

If you prefer to pick your own stocks, ETFs or funds, a self-directed brokerage account may be a better option.

With this account, you can build your portfolio yourself. Management is up to you, giving you complete control.

5 Ways a Financial Advisor Can Help Young Investors

A financial advisor can help you first understand investing concepts and then show you how to use them to actually build wealth. Together, you can grow your portfolio by matching your account choices, portfolio and contributions to your specific income, debt load and financial goals.

These are five ways a financial advisor for investing can help your portfolio.

1. Choose the Right Account for Your Situation

A financial advisor can help you decide whether a 401(k), Roth IRA, traditional IRA or taxable brokerage account makes the most sense for you. To do this, they will evaluate your income, tax bracket and timeline.

Example:

A 26-year-old client earns $52,000 a year and has access to a 401(k) at work with a 3% employer match. She has been putting $200 a month into a savings account because she did not know where else to put it.

The advisor calculates that she is leaving $1,560 a year in unmatched employer contributions on the table. He redirects her contributions to capture the full match first. He then opens a Roth IRA for the remaining $200 a month, since her tax bracket makes tax-free growth more valuable than an upfront deduction.

2. Build a Portfolio That Matches Your Risk Tolerance

An advisor can help you build an asset allocation that reflects how much volatility you can actually stomach, not just what a generic online quiz suggests.

Example:

A 29-year-old client opened a self-directed brokerage account two years ago and put everything into tech stocks. When the market dropped 18% over three months, he panic-sold and moved everything to cash, locking in his losses.

The advisor rebuilds his portfolio using a diversified mix of low-cost index funds across domestic stocks, international stocks and bonds. He also sets up automatic contributions so that the client buys each month consistently, regardless of market conditions.

3. Figure Out How Much You Can Actually Afford to Invest

An advisor can analyze your full financial picture and identify exactly how much you can invest each month without shortchanging your emergency fund or falling behind on debt.

Example:

A 23-year-old client wants to invest but has $28,000 in student loans at 6.8% interest and only $1,200 in savings.

The advisor runs the numbers and determines that the client does not yet have enough in emergency savings to absorb an unexpected expense without going into credit card debt. He recommends building the emergency fund to $5,000 first.

Then, he advises you to split future contributions between accelerated loan payments and a Roth IRA. This is because the 6.8% interest rate yields a higher return than most bond funds.

4. Plan Around a Major Life Event

An advisor can adjust your investment strategy when a big financial change is coming. This might be buying a home, getting married or changing jobs.

Example:

A 31-year-old client plans to buy a home in three years and has $40,000 invested in a mix of index funds.

The advisor flags that money earmarked for a down payment should not be sitting in the stock market with a three-year horizon. A market downturn could wipe out a significant portion of her holdings right before she needs the funds.

He moves the down payment savings into a high-yield savings account and a short-term CD ladder. Meanwhile, he keeps her long-term retirement contributions invested in equities.

5. Minimize the Taxes You Owe on Investment Gains

An advisor can help you structure your accounts and time your withdrawals to lower the tax liability on your investment returns each year.

Example:

A 34-year-old client has a taxable brokerage account, a Roth IRA and a 401(k). At tax time, he realizes he owes $2,100 in capital gains tax because he sold several positions held for less than a year.

The advisor introduces him to tax-loss harvesting, then identifies three positions currently trading at a loss that he can sell to offset future gains.

He also restructures which investments sit in which accounts. Bond funds, which generate regular taxable income, move into the 401(k), while growth-oriented index funds stay in the Roth IRA where gains will never be taxed.

Bottom Line

These five principles give you a solid foundation, but principles only matter if you act on them. Opening an account, capturing your employer’s 401(k) match and making your first contribution actually build wealth over time. Starting in your 20s rather than your 30s can mean hundreds of thousands of dollars more at retirement, simply because your money has more years to grow.

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