Most investors wish they had gotten started at a younger age, to let the magic of compounding work for them. Typically, investors are advised to begin salting away money in a 401(k) retirement account in their 20s, as they settle into the workforce.
But what about beginning even earlier? Getting started with investing as a teenager can yield substantial benefits in the long run, if you stick with it.
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With time on their side, teens can leverage the power of compounding to grow their wealth significantly over the years. Investing as a teen also fosters financial literacy and the ability to be patient during the inevitable bouts of market volatility.
“Teen investors should begin with a focus on education and goals of saving and investing a specific dollar amount each month, no matter how big or small,” says Chad Willardson, founder and president of Pacific Capital in Newport Beach, California.
He adds that learning about different investment options, risk management and basic financial principles is a key benefit of starting early, which can lay the groundwork for a lifetime of financial success. Here are some tips on investing for teens:
— Review brokerage account options for teens.
— Avoid crypto, stick with stocks.
— Do research to mitigate mistakes.
— Set obtainable goals.
— Tap into investing apps.
— Use all available resources.
Review Brokerage Account Options for Teens
Teens and their parents should be aware: A person younger than 18 can open a brokerage account, but it typically must be under the umbrella of a custodial or guardian account. This mechanism allows a parent or legal guardian to manage the account on behalf of the minor until he or she is of legal age.
Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts allow a minor to invest in stocks, exchange-traded funds, mutual funds, bonds and other assets. If a minor has some earned income from working, she or he can open a Roth individual retirement account or a 529 account, which is primarily designated for education expenses.
Nadia Vanderhall offers financial planning and education services through her Charlotte, North Carolina-based company, Brands and Bands Strategy Group. She says any of these accounts would give teens hands-on experience with securities and developing an investment strategy.
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Avoid Crypto, Stick With Stocks
She adds that while many teens and young adults are interested in cryptocurrencies, the foundation of investing is within the stock market.
“Index funds and ETFs would allow them to learn about diversification a bit more,” she says.
By investing in these vehicles, teens would learn more about the market itself and build their risk tolerance to handle other investments such as cryptocurrencies, commodities, futures or options, Vanderhall says.
Burke Koonce, investment strategist at Trust Company of the South in Raleigh, North Carolina, also likes the idea of young investors diversifying with index funds, mutual funds and ETFs.
“Every investor is different and will have his or her own personal risk tolerance, but it’s certainly the case that young investors have time on their side and can generally tolerate the normal ups and downs of the equity markets more easily than investors who are closer to retirement,” he says.
Koonce is a proponent of teens educating themselves about investing. “There is an ocean of information available and scores of online tools and apps, but in the end, reading at least one of a few well-known investment texts and speaking with a financial advisor is a good idea,” he says.
Do Research to Mitigate Mistakes
Investing mistakes are bound to happen, says Koonce, but a basic understanding of financial markets “is good medicine both before and after the fact.”
When it comes to allocating their new accounts, “teens do have the luxury of time, and investing for long-term growth will compound their gains significantly if given enough time,” Willardson says.
He advises against being reckless, such as investing in penny stocks or private, illiquid investments. “Investing for growth and adding money every month will put them decades ahead of most people, who begin so much later in life,” Willardson says.
Set Obtainable Goals
Like older investors, teens should have a goal in mind. Investors who simply want to make money often turn to panic trading and market timing, both of which typically have the opposite of the intended effect.
Instead, teen investors might think about investing for college, although it’s virtually impossible for a teenager with a part-time job to save enough in a short period of time to pay tuition at a four-year university. However, within a 529 plan, he or she could meet some college costs or even make payments toward a trade program or community college.
A teen investor could begin saving toward college expenses not covered by a 529 plan, such as entertainment or travel.
Kendall Meade, a certified financial planner with San Francisco-based SoFi, says teen investors could stash away money with an eye on other living expenses.
In those situations, investing in the stock market may not be the best path.
For example, she says, teens anticipating moving out of their parents’ house and living on their own in the next few years might invest with the goal of paying a security deposit, first month’s rent or a down payment.
“If you plan on using this money in the next three years, a high-yield savings account can be a great place to start,” she says.
READ: 7 Investment Apps for Beginners
Tap Into Investing Apps
Teens have an advantage over some older investors in another way, besides time in the market. Many of today’s financial apps are aimed at young investors, who can get started in the market in a way that’s fun and engaging.
“There has never been an easier time in history for investors, young or old, to access the financial markets,” says Koonce.
He adds that it’s critical for new investors to develop a sense of which tools and information are most important to them and choose the investing app or brokerage account that best suits their needs. He points out that most of the major apps for beginners offer commission-fee trades, but they vary widely in terms of planning tools, fund availability and ease of use.
“Robinhood is perhaps the best known of these apps that gamify the investment experience for beginners, but companies such as SoFi, Fidelity, TD Ameritrade, Acorns and even JPMorgan offer well-regarded beginner apps,” he says.
Use All Available Resources
Teen investors should soak up all the knowledge about investing that they can, says Kimberly Loftis, principal at Loftis Consulting and Financial Management in Chicago.
“Their school or local community may have a youth investment group or Junior Achievement (program) that helps them understand the world of business,” she says. Loftis adds that this will help them learn how to research companies for investment, and to learn how the stock market works.
“In addition, ultimately, the teen investor needs to understand what type of investor they want to be,” she says. “Are they investing solely for profit at all costs, or are they interested in investing for profit but also for the greater good?”
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Investing for Teens: How to Invest Money as a Teenager originally appeared on usnews.com
