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Investing 101 For Teens
Jacob, 17 yo, Colorado USA.
Hi guys! My name is Jacob and I am a blogger over at Teen Financial Freedom. Teen Financial Freedom is a personal finance blog for teenagers. A few weeks ago, I was on the WhyFi Matters podcast, with one of my fellow bloggers, Terry. Kriti and I have teamed up and now are working together to impact more teens!
That’s why today I will be sharing this guest post, “Investing 101 For Teens”. Investing is the number one tool you have to accumulate wealth. Sorry to break it to you, but you probably won’t be wealthy if you do not invest. That’s why today I want to talk about investing so you can get started today!
But, before we begin, I think we need to talk about what investing is. When you invest, you are putting something in (usually money) with the hopes of getting more out. Most of the time, you’re betting against everyone else. When you buy a stock you are essentially saying, “I believe this company is undervalued/I believe this company will go up in value from here”. It’s not a guarantee, so in a way, it’s like gambling. But, if you’re smart about it, it shouldn’t be like gambling at all.
Gambling is risky, you might win money, but most of the time you’ll lose. With investing, the goal is to reduce the risk to where you might lose money, but most of the time you’ll earn more. As the saying goes, “high risk, high reward”, if you lower your risk, you probably won’t make as much money, however, it’s much safer and therefore a more reliable way of increasing your wealth.
So how can we reduce the risk?
The key is diversification. Diversification means that you invest in several different companies rather than just one. If you invest in one company and that one company goes bankrupt, you just lost all of your money. But, if you invest in several companies and one goes bankrupt, it’s not the end of the world. That’s why many people invest in mutual funds. Mutual funds are used to diversify automatically and easily. Instead of having to go and make 500 different investments, you can invest into a mutual fund (like SWPPX) and it will split that money across the top 500 companies in the U.S (S&P 500).
Investing in mutual funds like these works because overtime the market usually goes up. Ever since the inception of the stock market, the value has gone up as our country and the world have become more and more developed. So because the stock market historically goes up, it’s a pretty safe bet that you will make money on your investments.
However the market does not always have an upwards trajectory. The market has natural cycles where it rises, and then drops, over and over again. For example, if you put in $1,000 into the stock market on February 20th of this year, you would only have $667 a month later on March 23rd due to COVID-19’s impact on businesses and the economy. However, if you put $1,000 in the market on March 23rd, you would have $1,400 as of July 3rd. That might seem a little like gambling, but that’s why you don’t invest for the short-term. Because if you invested your $1,000 back in 1980, you would have over $25,000 today!
So what would a good investment strategy look like?
You should start investing today. If you’re young, you have decades of compound interest (when your interest earns interest) working for you. If you are a teenager and reading this, you are in a great position to set yourself up for a very financially-successful life. After you start today, you should invest a little bit every single month. As you saw in our example, it’s hard to time the market, that’s why you should just invest every month regardless of what the market does. And of course, remember to diversify your investments. If you can follow those 3 rules of starting today, staying consistent, and diversifying your investments, you will be relatively rich sooner rather than later.
I hope that you enjoyed this post and learned something from it. If anything, I hope it sparked an interest in you that will inspire you to do more research and find out more about investing. If you are interested, I encourage you to head over to teenfinancialfreedom.com. There you can find so much more about investing and other things you need to know in order to achieve financial freedom