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New investors are seizing their 'greatest money-making asset,' expert says: But here's where they're falling short

"We've seen cryptocurrency and meme stocks deliver huge returns, and a lot of investors started thinking they were the next Warren Buffett."

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When millennials — those currently aged 26 to 41 — came of age in the wake of the Global Financial Crisis, young folks were reluctant to start investing, the experts said, and too conservative when they did it.

The new wave of investors appears to have no such issues. The pandemic and associated lockdowns brought with it a new enthusiasm among younger investors, who piled into the market. And those who recently took to investing aren't showing signs of slowing down.

Among investors who bought into markets for the first time in 2021, 86% plan to continue investing this year, according to a recent survey from Investing.com. That's smart, experts say.

By getting into markets sooner rather than later, younger investors are capitalizing on an important tool, says Ed Slott, publisher of IRAHelp.com. After all he says, "the greatest money-making asset a person can possess is time."

The other 14% may have been a little too enthusiastic to begin with, says Jesse Cohen, senior analyst at Investing.com. "A lot of first-time traders jumped in on these risky meme stocks and got burned, if you will," he says. "If you invest heavily in these sorts of assets, you're much more prone to a blown-up account" and significant losses.

Read on to find out what else experts say the new generation of investors is getting right investing, and what they may be getting wrong.

First-time investors are maximizing their time in the market ...

Young investors have an inherent advantage over their older peers because of the extra time they can spend in the market, Slott says.

Historically, over long periods of time, stock markets have tended to trend upward, although there are no guarantees. Still, the earlier you start investing, the more time you have to take advantage of compounding growth in your investments.

If you were a first-time investor in 2021, you began to harness the time you have in the market. And if you continue in 2022, as nearly nine out of 10 first-time investors intend to do, you increase your chances of building a robust nest egg.

Say you invested $10,000 in the market at age 30 and earned a 7% return on your money over the next 40 years. You'd end up with about $150,000 before taxes and inflation, according to Grow's compound interest calculator.

Had you started five years earlier at age 25, given the same return assumptions, you'd have $210,000.

But say you didn't have $10,000 to burn at age 25, since few do. Say that you instead invested $1,000 and then contributed $1,000 each year after. You'd still come out way ahead, with about $326,000 after 45 years.

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... but young investors are also taking on a lot of risk

If you started investing after late March of 2020, you've likely benefitted from a raging bull market which has seen the value of stocks in the S&P 500 just about double from the index's pandemic bottom. But huge gains in their portfolios have given younger investors some confidence which could be dangerous down the line, says Cohen.

"Everyone is a genius in a bull market," he says. "We've seen cryptocurrency and meme stocks deliver huge returns, and a lot of investors started thinking they were the next Warren Buffett."

Holding meme stocks and cryptocurrencies, whose prices fluctuate wildly based largely on investor speculation, isn't a problem in and of itself, experts say. But you could run into trouble if you hold big chunks of your portfolio in risky assets.

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"If you put everything into an individual company, for instance, there's a chance that it goes bankrupt," says Tess Zigo, a certified financial planner with LPL Financial in Palm Harbor, Florida. "As a general rule, we don't recommend taking on concentrated positions."

Instead, she offers, when it comes to risky assets, invest using a small portion of your portfolio — an amount small enough that if it loses value, that won't derail your plans. "It all comes down to how much money you can afford to lose and still retire [and] still pay for whatever you're hoping to pay for with your investments," she says.

Younger investors are holding their investments and buying dips ...

If young investors encounter an up-and-down market, some experts fear that they'll panic and sell investments at a loss. And while that's certainly possible, they may be up to the challenge when the market tests their mettle, says Cohen.

"Buying dips has become an incredible movement among young retail investors," he says, referring to a practice in which investors buy more of a particular asset when its price falls. "It's actually become a badge of honor to post losses on social media. They still take pride in holding. That's where you get phrases like 'diamond hands.'"

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That mentality could serve young investors well when the next bear market strikes, especially if they own a diversified portfolio of investments they expect to grow over the long term. Among the experts who recommend buying dips: author and personal finance expert Suze Orman.

"The more it goes down, the more shares you buy," she told Grow. Although there are never any guarantees with the stock market, the hopes is that "eventually it will turn around, and when it does, you'll have a lot of shares and then start making a lot of money. That's how fortunes are made."

... but many are also seeking 'instant gratification'

Fortunes generally aren't made overnight, but with certain stock and crypto prices going through the roof in recently years, younger investors have sought to get in on the excitement via easy-to-use mobile trading platforms.

Over the long run, looking for quick returns might get them into trouble for a couple of reasons.

For one, many first-time investors favor brokerage accounts, the gains from which are subject to taxation. "By trading in a brokerage account, you may be focusing on instant rewards and instant gratification," says Zigo. "And if you're starting out, you need to be focusing on the long term."

That likely means stashing at least some of your money in tax-advantaged accounts, such as a 401(k), IRA, or health savings account. Investing at enough in your workplace retirement account to receive any matching contribution that your employer might offer is ideally the first priority for any of your investable dollars, Zigo says.

Young investors would be wise to be wary of any investing advice that they receive from non-professional sources, such as on social media, Zigo adds — even if the advice seems solid or if the person offering it seems to be financially successful.

In the world of personal finance, there is little one-size-fits all advice, she says: "You need to make sure that your advice is coming from someone who is not only experienced, but who also knows your personal financial situation."

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