How to invest in your twenties

First of all I would like to start with the fact that I am not a financial adviser and that the recommendation listed in this article is my personal recommendation on how to invest in your twenties to my 23 year old little brother. We are both citizens of the European Union and due to this there are some specific investment restrictions when looking at ETFs.

In this article, I want explain in the same manner as I did to my little brother, why he should invest, what I do and would recommend to him and the length of the investment. When I started investing 1 year ago, my focus was to make sure that once we retire, we can survive and not struggle due to our countries public pension system. I mainly did not believe and still do not believe in the capacity for our nation to safe guard my family once we are in our sixties. This is why I took it all in my own hands, as you can read on my passive income blog.

Why should you invest in your twenties?

This is a simple question and has a lot to do with compounding interest. This is one of the key principles of personal finance and the main driver of wealth and pension security. Please allow me to show you some examples. Comparing myself and my little brother by investment age. We both started working right after college and there are 9 years difference between us, he will start investing in 2020 and I started in December 2018.

Case 1: Same salary, yearly increase and saving rate

The factors used to compare the impact of compounding interest between our investments show a big difference, when we only consider the age when each of us started.

• 10% Investment rate
• Yearly calculation
• 5% salary increase year on year
• 7% investment return year on year
• I start at 31 and my bro at 23
• Salary of 1000 EUR after tax at age of 23

The results are staggering, at the age of 65, my brother would have 165,005 EUR more than me invested. Even though when we invested the same amount year on year after the age of 31. His head start of only ~11,500 EUR invested in total between 23 and 31 made a 33% difference when comparing it to the outcome of my investment.

If you only take home one thing from this case, it should be the fact that: You should always start early.

Case 2: Same salary, yearly increase and saving rate, I want to catch-up with my brother

This is the case where I am stubborn and I want to catch-up with my brother so that we have a similar amount at age 65. In this case, I increase my yearly investment rate from 10% to 14% hoping that by 65 we are caught up.

I was right, we caught up around the age of 55 and by 65 I had ~31,000 EUR more than my little brother. This is good news, I can catch up, but in order to do so, my total investment were 224,186 EUR compared to his of 171,592.

Again I have learned the same lesson: You should always start early when investing.

Case 3: What I recommended to my brother for his investment approach

This is what I am recommending and I am not stating that he should go through the F.I.R.E. approach or for him to become frugal. I know I couldn’t and if he wants something more extreme, it must come from him or it will never work. Let’s get back now to my recommendation as this makes sense and it also makes a huge difference in the end.

• Start investing 10% on a monthly basis from age 23
• Invest an extra 50% of each salary increase until you have children (using 33 as the age for the graph)
• Resume investing that extra 50% of each salary increase once your children leave home (using 55 as the age)

See, this made a huge difference in the end. We are talking about ~127,000 EUR difference at 65. And the burden was not that big when you look at the amount invested. It is only 45,000 EUR more across the 42 years when calculated.

It is time now to think a little outside of the box and put this into a more realistic scenario. A lot of the members of the workforce do not only have 5% raises per year, some of them change companies, change roles, gain more responsibility and other benefits. Let’s now assume that every 5 year, my brother is able to increase his salary by 25% instead of 5% up until the age of 53. We used the same rules listed below for the comparison, just take a look to see how much a difference it makes.

Now we are talking about a difference of 222.200 EUR at 65, but an overall at almost double to what we had initially. This is caused by 6 raises in the lifespan of 25% instead of 5% per year and the same rules. Just image how much difference this does make at the age of retirement.

The last lessons what I want to teach my brother is that investing a little bit extra will go a long way down the line. Especially if you get this extra from your wage increase and do not sacrifice the lifestyle of the family for it.

I will not do more math than this for this chapter, but if you want to speculate, just open excel or check out an online calculator.

Some rules before investing

This is not only math, there are some rules and some behavior aspects that you need to factor in. This is why I have made a simple list that makes sense to me. I shared this with my brother and he already took some steps along the way. The rest will come with time and he is as free as any of you and can change or adjust the list based on his life experience and situation.

Step 1: Emergency Fund before you start investing

I am now talking about me and my brother and you should assess this based on what best fits you. Dave Ramsey recommends to start with a 1,000 EUR emergency fund and then to increase it to 3 to 6 months of your household costs. The increase is done once your debts (except mortgage) are paid.

Do what you feel right for this item, but keep in mind that you must have an emergency fund and you should not use it for random stuff. Do not use a deposit as you need to access it when an emergency occurs, but do not keep it accessible for you.

I decided to not use my local currency as it depreciates worst then EUR. In my country there are no EUR saving accounts, so I keep it all in EUR and get nothing for it at the end of the year. It just stays there, but the emotional impact is provides is insane. I feel at ease in case of issues and my wife is calm and allows me to invest as long as we do not touch the emergency fund.

In total I have 35,000 EUR as an emergency fund, but my brother also has 10,000 EUR out of that amount. In the worst case scenarios, when both my brother and I have an emergency, the whole 35,000 may be required, but if only one of us has one, then the sum should be more than generous to cover that surprise.

Step 2: Document and decide yourself on what to invest

This is another aspect that makes a lot of sense. I documented myself and found what seems OK for me. My brother did not want to document himself for now, so I am sharing my ideas with him. I listed down the most common ideas used for investments. It is now up to him to pick and choose what to do.

Real-estate

This is the most common and very wide across the globe. The problem is that this requires some more know-how and sweat on the investors end. The main challenge that I have with this approach is that face that in my country over 90% of the population owns their house and the regulation for both landlords and tenants is not properly managed. I see this as a risk and I do not want to go in debt or use all my investments to buy and let an apartment where I have to deal with tenants and their demands or their lack of decency (cases may differ, this is me seeing it as not optimum for me).

Equity investments

ETFs are what I recommend to my brothers, better said UCITS ETFs as we are EU citizens. If you are not aware, this is the main European framework covering collective investment schemes. These are accessible for me as a retail investor via Interactive Brokers.

I also bought some stocks, but those were something like a hunch, bet, etc. on my side, ETFs should be a safer approach that I am comfortable to pitch to my little brother. Further down this article, I will recommend a list of ETFs based on which he will have to choose what he prefers. 

Peer to peer lending

This is currently at a hyper right now and I use two platforms across which I invested around 15,000 EUR. I would recommend each of you to check out my Mintos review and my Crowdestate review on this site. Currently I would not recommend any of these platforms for my brother as there is no way to accumulate the income from them in a tax efficient manner for us. I have to pay tax on all gains from these platforms together with health and pension. The reason why I keep investing in them for myself is because I already pay yearly taxes on my company and the only change for me is that the income tax increases by the amount returned from these platforms to me. I do not have to pay anything extra for pension or health.

Other

The reason why I do not state invest in yourself or build a business, etc. is because I am talking about his 10% investment. If he wants to learn, educate, improve or become an entrepreneur, then it is up to him to further invest any amount he wants on top of these 10% in that direction. Some say that the so called fast lane is better, and it may be. I currently am not on that lane and hope to be there one day, but via this 10% starting at his age, at least he should be safe for later on in life.

Step 3: Protect yourself

This is again something more personal to me and some of it does not apply to my little brother for now. Although some insurance may not work in your benefit, there are other types which can complement your emergency fund. You can read a whole article about why I buy insurance, but to put it in a few lines, I recommend that you cover the following:

• Life insurance (20 to 30 year policy) once you are married or have a mortgage. The insurance should cover at least the mortgage or leave something behind you to the family. Once the policy is done, you should have enough in your investment portfolio for them and no mortgage
• Rare disease insurance, for those situations when your emergency fund cannot cope with the expenses like cancer, transplant, etc. For example, mine covers up to 1,000,000 EUR per year or 2,000,000 EUR in total

Step 4: Invest

The last step is to start investing and to stick to your investment strategy. Each of these is as critical as the other one. If you do not invest, then this was just a waste of time and if you do not stick to a strategy, you may derail and start occurring losses.

In what to invest in your twenties

Before we start looking at some investments funds, it makes sense to set the group rules so that you can understand how I picked these funds. Please note that I have used Justetf to find both my ETF portfolio and the one I will list in this article for my bro.

The main conditions I have listed are the following:

• UCITS ETF
• Low fee
• Accumulating distribution policy
• Over 500 million

			Fund size	% Fee	1 Yr	3 Yr Annualized	5 Yr Annualized
XCS6	Xtrackers MSCI China Index UCITS ETF 1C	url	1007	0.65	15.38	12.20	11.00
XD9U	Xtrackers MSCI USA Index UCITS ETF 1C	url	4966	0.07	25.34	13.60	18.25
CNDX	iShares Nasdaq 100 UCITS ETF (Acc)	url	2956	0.33	30.89	22.49	26.59
MUUSAS	UBS ETF (IE) MSCI USA SF UCITS ETF (USD) A-acc	url	697	0.15	24.86	13.34	17.91
IROB	L&G ROBO Global Robotics and Automation UCITS ETF	url	793	0.80	26.36	14.36	16.86
IWDA	iShares Core MSCI World UCITS ETF USD (Acc)	url	19709	0.20	23.37	11.08	14.26
MEUD	Lyxor Core STOXX Europe 600 (DR) – UCITS ETF Acc	url	1276	0.07	25.75	8.87	8.26
SPY4	SPDR S&P 400 US Mid Cap UCITS ETF	url	631	0.30	19.59	6.60	13.94
SXR1	iShares Core MSCI Pacific ex Japan UCITS ETF (Acc)	url	1786	0.20	17.95	7.58	9.48

This list can increase, but I do not want to put my brother to choose from 100s of options. I want to keep it simple for him for now and then further align along the way. Based on the above list, I would recommend him to think of a split like the 3 options listed below.

	% Fee	1 Yr	3 Yr Annualized	5 Yr Annualized
All-rounder with a hint of robotics	0.292	24.46	13.73	16.37
More US focused portfolio	0.237	24.47	13.53	16.93
All-rounder with more inclination to US	0.302	24.62	13.63	16.82

Based on this, the more US focused one has better returns at a lower fee, but if you want to further diversify and bet less on the US market, you could look at the all-rounders or even move into something that is closer to my personal financial portfolio.

Option 1 – All-rounder with a hint of robotics

Diversification across Worlds, Nasdaq and US for 60% of the portfolio and the remaining 40% split into China, Small cap in Europe, Asia pacific and Robotics.

20%	iShares Nasdaq 100 UCITS ETF (Acc)
20%	iShares Core MSCI World UCITS ETF USD (Acc)
20%	Xtrackers MSCI USA Index UCITS ETF 1C
10%	Lyxor Core STOXX Europe 600 (DR) – UCITS ETF Acc
10%	Xtrackers MSCI China Index UCITS ETF 1C
10%	L&G ROBO Global Robotics and Automation UCITS ETF
10%	iShares Core MSCI Pacific ex Japan UCITS ETF (Acc)

Option 2 – More US focused portfolio

Diversification across Worlds, Nasdaq and US for 60% of the portfolio and the remaining 40% split into China, Small cap in Europe, and further US stocks.

20%	iShares Nasdaq 100 UCITS ETF (Acc)
20%	iShares Core MSCI World UCITS ETF USD (Acc)
20%	Xtrackers MSCI USA Index UCITS ETF 1C
10%	Lyxor Core STOXX Europe 600 (DR) – UCITS ETF Acc
10%	Xtrackers MSCI China Index UCITS ETF 1C
10%	SPDR S&P 400 US Mid Cap UCITS ETF
10%	UBS ETF (IE) MSCI USA SF UCITS ETF (USD) A-acc

Option 3 – All-rounder with more inclination to US

Diversification across Worlds, Nasdaq and US for 60% of the portfolio and the remaining 40% split into China, Small cap in Europe, Mid Cap in US and Robotics.

20%	iShares Nasdaq 100 UCITS ETF (Acc)
20%	iShares Core MSCI World UCITS ETF USD (Acc)
20%	Xtrackers MSCI USA Index UCITS ETF 1C
10%	Lyxor Core STOXX Europe 600 (DR) – UCITS ETF Acc
10%	Xtrackers MSCI China Index UCITS ETF 1C
10%	SPDR S&P 400 US Mid Cap UCITS ETF
10%	L&G ROBO Global Robotics and Automation UCITS ETF

Conclusion

This is not only math, there are some rules and some behavior aspects that you need to factor in. This is why I have made a simple article for my brother to read, but the rest is up to him. You always need to follow a key set of rules based on common sense and stick to the strategy:

• Put in lump sums if you have the money as early as possible, or keep up with the monthly investments
• Look for low fees – broker, ETF costs, etc.
• If you go long, then go long. Do not change your mind and do not exit until you reach your target
• Do not forget that in 20-30 years’ time, every cent will count towards making the difference

This is all that I would like to state for this article, I know it would be best to let my brother decide his portfolio, either based on what is here or based on my ETF decisions, and then see him write the conclusion instead of I.