It would be tough to meet someone who says they began investing too early. The sooner a person starts putting away money for the long term, the sooner they can take more risk and benefit from the magic of compounding.
According to brokerage Fidelity, there are a few starting points that could make the process easier for young investors:
— Teach teens the basics of investing. Fidelity recommends starting by breaking down complex words and concepts into easy-to-understand terms.
— Start with companies your teens know. “Challenge teens to design a portfolio, or collection, of companies they know,” Fidelity analysts say. “Ask them questions like: What clothes or shoes do you wear? What are your favorite tech devices? What streaming services do you use?”
— Stress the importance of diversification. This is the tried-and-true advice to not put all your eggs in one basket.
— Teach teens the benefits of a buy-and-hold strategy. “In the short term, markets go up and down, often unpredictably. In the longer term, however, the stock market has historically moved upward,” says Fidelity.
— Teach patience: Show teens how compounding works over time. According to Fidelity, “Albert Einstein said that compound interest is ‘the most powerful force in the universe.’ Our kids have time on their side, and the ability to invest over many years.”
Here are some ways to get teens interested in investing:
Start Small and Diversify
It’s safe to say most teen investors are probably starting with a small amount of money.
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Teens who have earned income from wages, salaries, tips, bonuses, taxable benefits or self-employment can open a Roth individual retirement account. Within the Roth IRA, they should diversify their investments to avoid over-concentration in any single stock or type of stock.
“Contribute as much as you can afford up to the annual limit. Invest the account in a broad-based, low-cost index fund,” says Chris Urban, a certified financial planner and founder at Discovery Wealth Planning in McLean, Virginia.
“Several well-known investment companies offer a single mutual fund and/or exchange-traded fund that would make the process very simple,” he adds.
[What Are the Pros and Cons of a Buy-and-Hold Strategy?]
Regardless of how much money is in a teen’s account, the important thing is to begin investing.
“Starting from zero, investing just $25 per week for 50 years turns into over $571,000, assuming a hypothetical 7% rate of return,” says Jake Skelhorn, a certified financial planner who’s a partner and wealth advisor at Spark Wealth Advisors in Jacksonville, Florida.
“But remember to diversify,” he adds. “Imagine putting everything into a company like Blockbuster — if teens today remember the pre-Netflix era!”
Teens who have years and even decades of compounding ahead of them might consider starting with a total world stock fund, Urban says.
“Automatically reinvest the dividends and just let compounding take over,” he adds.
Take Advantage of the Magic of Compounding
As Fidelity pointed out in its article, teens have time on their side, and there’s no better time than the present to put money to work in the market.
Fidelity referred to the rule of 72, which can help investors calculate how long it may take for their money to double at a given interest rate.
“For example: Let’s say that an investment is yielding 7% annually. You take 72 and divide it by 7 and it shows that the money will double in 10.28 years,” Fidelity wrote.
Learn How the Market Works
While actual investing is usually the best way to learn how capital markets function, it’s also valuable for teens to understand how stocks and bonds are traded and what factors cause price movements.
Teen investors may turn to apps and YouTube channels as reliable sources of information, rather than academic tomes or books aimed at retirees.
“Ben Felix is a great personal finance YouTuber that teens can watch to learn the basics, as well as more advanced topics when ready,” says Skelhorn.
Apps that may be helpful for teen investors include Acorns, UNest and MyWallSt. Brokerages such as Fidelity and E-Trade have their own apps geared toward beginning investors. Newer brokerages such as WeBull and Robinhood also cater to newer investors with a range of educational features.
Understand the Difference Between Speculating and Investing
Young investors can sometimes be drawn to the fast-paced excitement of trading meme stocks such as AMC Entertainment Holdings Inc. (ticker: AMC) or GameStop Corp. (GME). They also enjoy newer types of investments, such as cryptocurrencies.
While it’s true that teens have time to take more risk in the market, they should be prepared for losses if they take an approach that veers toward trading and speculation, rather than long-term investing.
“Actively trading traditional stocks, meme stocks and cryptocurrencies tends to be a recipe for losing money,” says Aaron Sherman, a CFP who’s president of Odyssey Group Wealth Advisors in Lancaster, Pennsylvania.
“Just like other investors, teens will benefit from a diversified portfolio of low-cost, long-term investments,” he says.
“However, teens are also in a good place to experiment because the stakes are relatively low,” he adds. “If you’re 16 and lose all your money day trading, that’s a shame, but life goes on.”
Sherman adds that the education teen investors get from first-hand experience may be worth more than a few hundred dollars lost in the market.
“The same can’t be said for someone near retirement who is gambling with their entire nest egg,” he says. “Youth is a time to experiment and learn valuable lessons, even if you make a few mistakes along the way.”
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Investing for Teens: How to Invest Money as a Teenager originally appeared on usnews.com
Update 06/13/24: This story was previously published at an earlier date and has been updated with new information.
