Young Investors: Strategies For Early Financial Success

Investing at a young age can be a great way to build wealth, learn about the markets, and develop good financial habits that will serve you well throughout your life. The key advantage of investing early is time, which allows your investments to grow and benefit from the power of compounding. Here are some steps to help you get started on your investment journey:

1. Educate yourself: Understand the basics of investing, including different types of investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Learn about key concepts like risk tolerance, diversification, and compounding.

2. Set clear goals: Determine your investment goals and timeline. Are you investing for the short term or long term? Do you want to save for a down payment on a house, build a retirement nest egg, or simply grow your wealth?

3. Open an investment account: You will need a brokerage account to buy and sell investments. If you are under 18, you will need the help of a parent or guardian to open a custodial account.

4. Choose your investments: Start with stocks of companies you are familiar with and gradually diversify your portfolio. Consider purchasing index funds, which offer immediate diversification.

5. Start with small amounts: Begin with small investments until you become comfortable with the process. Remember to regularly review and adjust your portfolio.

6. Practice with mock portfolios: You can use dummy trading portfolios or stock market games to get a risk-free understanding of investing.

7. Avoid investment scams: Be cautious of promises of unusually high returns, unfamiliar companies, and time-limited offers. Always do your research before investing.

Learn the basics of investing

Before you start investing, it's important to understand the basics. This includes learning about different types of investments, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). It also means understanding key investing concepts like risk tolerance, diversification, and compounding. There are many resources available to help you learn about investing, from books and online courses to investment games and financial news sites. Here are some key basics to get you started:

• Risk tolerance: This refers to how much risk you are comfortable taking with your investments. It's important to assess your risk tolerance before investing, as it will help you determine the types of investments that are suitable for you.
• Diversification: Diversifying your investments means spreading your money across different types of assets, industries, and companies. This helps to reduce risk, as it ensures that all your money is not tied up in a single investment or industry.
• Compounding: Compounding is when the returns on an investment generate their own earnings, which are then reinvested to generate even more earnings. Over time, compounding can lead to significant growth in your investments.
• Stock market basics: If you're investing in individual stocks, it's important to understand how the stock market works, including how to research and analyse stocks, place trades, and monitor your portfolio.
• Investment accounts: There are different types of investment accounts available, such as brokerage accounts, retirement accounts (e.g. 401(k) or IRA), and custodial accounts for teenagers. Each type of account has its own rules and tax implications, so it's important to understand the differences before opening an account.
• Investment research: Learning how to research and analyse investments is crucial. This includes understanding financial statements, performance metrics, and industry trends. Resources like Investor.gov and Investopedia offer a wealth of information for beginners.
• Long-term perspective: Investing is typically a long-term endeavour, and short-term market fluctuations are common. It's important to have a long-term perspective and not make impulsive decisions based on short-term market movements.
• Fees and costs: Investment fees and costs can eat into your returns over time. It's important to be aware of the fees associated with different investment options and to prioritise low-cost investment vehicles when possible.

By taking the time to learn the basics of investing, you'll be better equipped to make informed decisions, manage your risk, and work towards your financial goals.

Understand the importance of investing early

Investing early is important because it gives your money more time to grow. The key to investing is time. The younger you are, the more investing will work in your favour, especially with compound interest.

Compound interest is when interest builds off interest. For example, if you put $1,000 into a savings account and your financial institution pays you 4% back in annual interest, you would earn $40, resulting in $1,040 per year. Compound interest means that next year, you will earn interest from the $1,040 instead of $1,000, and so on.

The longer you leave your investments, the more time they have to ride out the stock market's ups and downs. For example, investors who took a chance on Apple and Microsoft early on have reaped the rewards because they were willing to take a risk and had time on their side.

Starting to invest early can also help you develop financial literacy skills, learn about risk management, and build a strong foundation for future financial success. It can help you to build good financial habits, such as regular saving and long-term financial planning. A longer investment horizon also allows for a higher risk tolerance, which can lead to higher returns.

The benefits of investing early are clear when you look at the numbers. Let’s say you begin to invest for retirement when you begin your career at age 22. If you consistently set aside $100 per month and earn a healthy 10% return on your investment (compounded annually), you would have $710,810.83 when you reach age 65. However, if you had started investing at age 15, you would have $1,396,690.23, or nearly double the amount.

Know how to identify appropriate investments

When it comes to investing as a young person, there are several options available to you. If you are under 18, you will need the help of a parent or guardian to open a custodial account, but there are still ways to begin your investment journey.

Stocks

Choosing stocks from companies you are familiar with is a good place to start. Look at businesses your relatives work for, companies discussed in business publications like the Wall Street Journal, or big companies included in an index like the Dow Jones Industrial Average. You could also consider companies that produce items your friends and classmates like, such as Nike, Converse, Vans, Chipotle, or Starbucks.

Exchange-Traded Funds (ETFs)

ETFs are a less risky option than investing in individual stocks. ETFs are a diversified group of companies that trade like stocks but are less volatile as they reflect the price movements of the underlying stocks. Look for ETFs backed by broad market indexes such as the Dow Jones Industrial Average, the S&P 500, or the NASDAQ.

Savings Bonds

US savings bonds are a very safe, low-risk investment option for teens. Series EE and Series I Savings Bonds are low-risk investments that pay interest for up to 30 years.

Index Funds

Index funds are a good way to get immediate diversification without having to worry about selecting individual stocks. These funds consist of either an ETF or a mutual fund and follow a market index. An example is the S&P 500, which tracks the performance of shares and stocks of companies across the US.

Retirement Accounts

If you are employed, you can also consider opening a retirement account, such as a Roth IRA or 401(k). With a Roth IRA, you can withdraw funds before retirement age for things like a first-time home purchase, education expenses, or medical expenses. With a 401(k), you can take advantage of any employer-matching contributions.

Bonds

Bonds are a less risky option than stocks but offer lower returns, so they are more suitable for older investors.

Mutual Funds

Mutual funds are actively managed and invest in an array of assets. They provide built-in diversification but often charge steep fees.

Certificates of Deposit (CDs)

CDs are a more conservative option than stocks or bonds, with a moderate risk profile and lower return potential.

Cryptocurrency

Cryptocurrency is a highly volatile investment option that teens and kids should probably avoid unless they know what they are doing.

When selecting investments, it is important to understand the risks involved and only invest money you can afford to lose. It is also crucial to do your research and not invest in anything that seems too good to be true.

Learn about different types of investment accounts

There are several types of investment accounts that you can open as a young person. Here are some of the most common ones:

• Custodial account: This is an account where an adult, typically a parent or guardian, opens an investment account on a teen's behalf at a broker. The money and control of the account are transferred to the teen when they reach the legal age, which is usually 18 or 21 years old, depending on the state. Examples of custodial accounts include Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts.
• Roth Individual Retirement Account (Roth IRA): This is a type of retirement account that can be opened by teens with earned income from a job. It allows them to invest some of their money alongside an adult in a custodial account. While it provides an opportunity to learn about investing with real money, it also comes with certain restrictions and guardrails.
• 529 Plan: Similar to a Roth IRA, a 529 plan allows teens with earned income to invest for educational expenses such as college tuition.
• Joint brokerage account: In this type of account, the adult and the teen co-own the account and share legal ownership of the assets. This option may allow teens to take a more active role in investment decisions, although these decisions are generally subject to the approval of the adult co-owner.
• Brokerage account: A taxable account, also known as a brokerage account, is useful if you're saving for short-term goals like buying a house, a car, or a vacation. With this type of account, you can access your money at any time and for any reason, without the penalties and tax implications associated with early withdrawals from retirement accounts.

Understand the risks of investing

Investing is thrilling but can be stressful and disappointing, playing with your emotions. It is important to understand the risks of investing, especially for young investors. The main downside is that you could lose some or all of your money. Different types of investments carry different levels of risk, and it is important to understand this trade-off when determining your investment strategy.

Young investors have time on their side, and this allows them to take more risks, thereby increasing their potential rewards. They can afford to ride out the inevitable market downturns and wait for the markets to recover. This is why classic investment advice suggests taking more risks when your goals are far in the future but becoming more conservative as you approach the time when you need to access your money.

However, it is important to discover your own style as an investor and be comfortable with the level of risk you are facing. Being aware of your risk tolerance is critical to knowing what type of investments you want. Your financial counsellor can help you decide which investment options are best for your goals.

Some investments are riskier than others. Stocks, for example, can be risky due to their changes in value, known as volatility. If the company you invest in begins to struggle, you may be left with shares worth less than you paid for them. With this risk comes the potential for higher returns, making stocks useful for younger people with long time horizons.

Bonds, on the other hand, are considered fixed-income investments with preset payments and are less risky than stocks, but they offer lower returns, making them less suitable for young investors seeking long-term growth.

Cryptocurrency is another investment that young investors should probably avoid, as its value is highly volatile.

No matter your age or where you are in your investing journey, it is important to maintain a diversified investment portfolio. Investing in different types of assets can help spread out your risk because when one investment type performs poorly, another that performs better can help smooth out your portfolio's overall volatility. While diversification won't prevent losses, it can reduce your risk of being too heavily invested in the worst-performing part of the market.

Frequently asked questions