The Best Way to Start Investing When You're Young
by Christian Hudspeth
Question: Hi there. I need your advice. I'm only 19 and I really need to start investing. Where can I start?
-- Tirelo M., Gaborone, Botswana
Answer: You've definitely got the right thinking, Tirelo. Starting at such a young age, you have one huge advantage over most people as you build your wealth: time.
The earlier you start investing, the more time your money has to compound and grow. Just think -- if you were to start investing $100 each month into the stock market and you earn an average return of 8% per year, your investment account could grow to $104,241 by the time you turned 45 and to a whopping $572,477 by your 65th birthday.
If you managed to sock away $200 a month into the market starting today, you could potentially have $1 million by the time you turn 63, according to our millionaire savings calculator.
It's exciting to think that a little bit of your income each month can grow to hundreds of thousands of dollars in the future. But before you even think of investing your first dollar, I'd like to suggest a few ground rules.
First, make sure your finances are in order. If you haven't set aside money for emergencies, if you carry high-interest credit card debt, or if you plan to go to college in the near future, you may want to hold off on investing until those expenses are out of the way.
Basically, there's no sense in tying up your money in investment accounts when you're busy paying more than 12% interest on credit card debt and you don't have enough money set aside to feed yourself in case you lose your job.
Second, remember that investing is not some get-rich-quick trick and that it's best to keep your money in stocks for the long-term -- at least five, but preferably more than 10 years.
Believe me, unless you're a seasoned professional, blindly placing hot-shot stock trades like Jim Cramer on Mad Money is the fastest way to lose all of your hard-earned cash. If it were that easy to make money by buying and selling stocks right away, nearly everyone would be rich!
Finally, if you're just starting out, it never hurts to brush up on the investing basics. I'd start by skimming our guide "Stock Market Investing 101: How Anyone Can Start Investing Today." It will give you a good foundation on stock investing and walk you through opening an investment brokerage account, which you'll need if you want to purchase stocks, bonds, ETFs or mutual funds.
[Learn how to start investing as little as $100 a month in The Lazy Man's Retirement Plan.]
So now that we have all that out of the way, let's talk investing!
Where to start? It all depends on what kind of investing you wish to do. Because you're young, I'll take a guess that you want the higher returns that stocks and stock-based mutual funds or ETFs can provide, rather than slower-growing investments like bonds and CDs.
The Easy Way to Start: How to Invest in Mutual Funds And ETFs
If you're less confident about researching and choosing individual stocks and less willing to take big risks with your money, you may want to start out by investing in mutual funds. I personally started investing in mutual funds when I was 18 through a 401(k) plan offered at my first job and still find them much easier to invest in and manage than individual stocks.
Mutual funds are investments that hold a basket of stocks or bonds. When you buy a share of a mutual fund, you're investing in multiple companies or bonds.
For example, if I invest in the Vanguard 500 Index Fund (NYSE: VFINX), I'm automatically invested in the 500 stocks that the mutual fund holds, which include Exxon Mobil, Apple, General Electric, Microsoft and several others.
The key advantage that a mutual fund gives you over individual stocks is diversification.
If you're invested in the Vanguard 500 Index Fund and Microsoft's stock has a great year, you'll get some of the gains. If General Electric's stock goes up over the year, you'll get some of its gains, as well. And if one stock in the mutual fund has a bad year and plummets, you won't have to take the full loss because you'll have most of your money in the other hundreds of stocks that the fund holds.
In short, a mutual fund keeps your money spread out among several investments at once so it can reduce your risk and keep your returns growing steadily.
If you like how mutual funds work, you may also like investing in ETFs (exchange-traded funds). ETFs are almost identical to mutual funds except they do not have a fund manager and therefore carry much lower investment fees. I wrote about an easy way to build your own well-diversified portfolio of ETFs (based on my own portfolio) in "The Lazy Man's Retirement Portfolio."
The Harder-But-Exciting Way: How to Invest in Stocks
If you like the idea of outsmarting the rest of the pack and "beating the market" with your stellar investment picks and you don't mind spending a few hours each month researching companies' financial statements and financial news, then you may find excitement in good old-fashioned stock investing.
Investing in individual stocks is much riskier than investing in mutual funds and will require a lot more work if you want to be successful.
The upside is that through researching a company and its financials, you'll learn a lot more about how businesses operate and grow -- and hopefully you'll get to reap some of that profit growth and pocket some great stock returns.
The downside is, there's always a chance you'll lose a lot of money (sometimes all of the money you invested) if you choose a bad company to invest in.
So, how do you choose the right stocks? If you have no clue, I'd start by thinking of all your favorite brands, companies that you think really dominate their industries -- the ones that really "have it down," so to speak. Maybe it's Apple, Nike, Under Armour, or Microsoft. It could even be a more under-the-radar company that no one's talking about but that's making a genius product -- such as the company Corning, which makes the scratch-resistant glass on the popular iPhone.
Once you've thought of a few good companies, it's time to do your homework to see if they're doing well financially. Don't worry, it won't be that hard. I've outlined exactly what to look for in "8 Key Facts To Know About A Company Before You Invest."
The eight items mentioned there will help you determine if a company is financially sound, profitable and growing -- the key features to a potentially great stock investment that could deliver solid gains year after year.
When to Sell Stock
After you've invested in some great companies, there's one more tip I'd like to share: Take a look at your stocks from time to time and have an exit strategy if things don't go well for one.
That doesn't mean sell your stocks when everyone else does. In fact, as a buy-and-hold investor, I'd suggest fighting the urge to sell at all if you think you've found a good stock.
But, you should always be monitoring the financials of the companies you hold and be prepared to sell. If you want to know when it's time to sell a stock that you feel leery about, our "4-Minute Checklist" will help make your decision easier.
It's Never too Early (or Too Late) to Start Investing
Whether you're young or older, here's the truth: It's never too early -- or too late -- to start investing! Work hard, keep plowing money each month into your investments, and you'll thank yourself when you hit your first million not too long from now. Best of luck!