It’s rare to find someone who regrets starting their investments early. The earlier a person begins saving for the future, the more they can leverage risk and benefit from compound interest.
According to Fidelity, here are some tips to help young investors get started:
1.Teach Teens the Basics of Investing: Simplify complex terms and concepts for easier understanding.
2. Start with Familiar Companies: Encourage teens to create a portfolio of companies they know and use regularly. Ask questions like, “What clothes or shoes do you wear? What are your favorite tech devices? What streaming services do you use?”
3. Emphasize Diversification: Advise them not to put all their money into one investment.
4. Promote a Buy-and-Hold Strategy: Explain that while markets fluctuate in the short term, they tend to grow over the long term.
5. Teach Patience: Show how compounding works over time, quoting Albert Einstein’s view of compound interest as “the most powerful force in the universe.”
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Ways to Get Teens Interested in Investing
Start Small and DiversifyMost teens will likely begin with a small amount of money. Those with earned income can open a Roth IRA and diversify their investments within it to avoid over-concentration.
Chris Urban, a certified financial planner, suggests contributing as much as possible up to the annual limit and investing in a broad-based, low-cost index fund. Many investment companies offer simple mutual funds or ETFs for this purpose.
Starting early, even with small amounts, can lead to significant growth over time. For example, investing $25 per week for 50 years at a hypothetical 7% return could grow to over $571,000, according to Jake Skelhorn, a certified financial planner.
Utilize Compounding
Teens have the advantage of time, which is crucial for compounding interest. Fidelity explains the rule of 72 to show how long it takes for money to double at a certain interest rate. For instance, with a 7% annual return, money will double in about 10.28 years.
Learn How the Market Works
While actual investing teaches how capital markets function, it’s also important for teens to understand stock and bond trading and the factors influencing price movements. Reliable sources like YouTube channels and apps can be educational. Ben Felix is recommended for personal finance basics, while apps like Acorns, UNest, and MyWallSt are helpful for teen investors. Fidelity, E-Trade, WeBull, and Robinhood also offer beginner-friendly educational features.
Differentiate Between Speculating and Investing
Teens might be attracted to the excitement of trading meme stocks or cryptocurrencies. While they can afford to take more risks, they should be prepared for potential losses if they engage in speculative trading instead of long-term investing.
Aaron Sherman, a CFP, advises teens to maintain a diversified portfolio of low-cost, long-term investments. While teens can experiment due to the lower stakes, losing money in speculative trading can be a valuable learning experience. This isn’t the case for those near retirement who might risk their entire savings.
In conclusion, youth is a great time to experiment and learn valuable lessons, even if it means making a few mistakes along the way.
