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Writer's pictureLiam Thompson

Why, How and Where Every Teenager Should Start Investing

Updated: Oct 14, 2021

Investing is for adults right? For like, economists or whatever, right? Old guys in suits and stuff... right?

 

Wrong.


Yeah yeah, we have apps and all that now but you don't wanna spend ages learning to invest just to lose all your money - imagine how much cool stuff you could buy instead!



And yes, I used the Hotline Bling meme in 2019.


What I'm tryna get at here is no, you don't have to be old and experienced to invest, and no, it really isn't a risky business at all if you have a sound investment strategy (stick around). The main reason people (and especially younger people) lose money while investing, is because they have literally no idea what they're doing.

 

Why Should You Start Investing Now?


Assuming you're a teenager or young adult, you have an extremely long investing career ahead of you - which is the beauty of starting now. Even if you don't make incredible returns for the first decade of your career, you're getting priceless experience which will give you a huge advantage when you start having more money to invest later on in life.


There's also a little miracle called compound interest, which Einstein called "the eighth wonder of the world" (he actually did lol). In essence, compounding is the act of getting interest on interest. That might make no sense, but here's why it's so beautiful:


Let's say that in 2019, you start the year with $10,000 to invest, and you invest all of it (don't do this haha it's to prove my point). Let's say you get a 7% return every year until 2029, and you don't touch or invest more money even once. By 2029, you will have $20,097. Say you hadn't started early, and you invested that same $10,000 in 2029 with the same return (somehow getting 70% in a year) - you would now have $17,000. That's $3,097 you made just by starting earlier and doing literally nothing but sit there. Meme time:



 

How Should You Invest Your Money?


For someone who is a beginner (or even if you're pretty onto it) with such a long investing horizon, there's really only one solid way to invest.


Dollar cost averaging in index funds and bond ETFs.


Let me explain each of those one by one. Dollar cost averaging is an investment technique whereby you invest set amounts at specific increments throughout time - no matter what the market is doing. For example, I might invest $100 a week, every week. Boom, dollar cost averaging. Why do we do this? Because it's far less risky than any other way of investing - if I invest all of my $10,000 at once, I risk buying shares at their peak, and then (at least over the short term) I've lost money. By spreading out my investments, I let the general trend of the market do the work (which we know is upwards).


Index funds are funds that most noobs are familiar with like the S&P 500 or the DJIA. Essentially, they are an easy way to diversify your portfolio as they contain heaps of different companies - allowing you to put your eggs in different baskets while still only investing in one fund. Investing titan Warren Buffet himself said that he thinks the average investor should just buy and hold the S&P 500, because that way you're pretty much just investing in an entire country and not one company. Remember though, you don't have to just invest in America (although it's a pretty good idea for the most part), the right foreign index funds can be very profitable - so do your research!


Bond ETFs are a beautiful thing. There are heaps of different types, but on the whole bonds will largely go unchanged in price, but give you a pretty decent yield as dividends (in other words, they are very low risk but slightly lower return too). An ETF (exchange-traded fund) just means you can invest in multiple bonds without actually buying a singular bond which has a five or ten year maturity - so you can freely trade them.

 

Okay cool. You know what to invest in, but in what proportions? That largely depends on the market at the time, but Benjamin Graham explains it best in his book The Intelligent Investor (everybody should read this book). To sum up Graham's ideology, you should never have more than 75% in either bonds or common stocks at any given time, with (of course) never less than 25% in the other. If it appears that common stocks (index funds!) are overpriced, don't buy them - buy bonds instead. If it appears that the price on common stocks are very low, BUY THEM.


For many this is a counter intuitive investment strategy - when something has a high price we think it will probably go higher right? When something is dropping rapidly in price it's just gonna drop more right? Don't view investing like this, view it like going shopping. Are you gonna buy the $40 t-shirt, or the exact same one next door for $5? Investing is a waiting game - sure you might buy low and then it'll go lower, but that's AWESOME because now you get an even better deal, and when it does go back up (which it will), you've profited even more! The higher you buy, the lower your profit margin.


Together with dollar cost averaging, a typical week might go like this:


"Okay, so I have $100 to invest, and my portfolio is currently is 40% the S&P 500, 20% the NZ Top 50, and 40% the NZ Bond ETF. The share price of the S&P 500 has rocketed this past week, I think I'll spend $25 on the NZ Top 50 and $75 on the NZ Bond ETF, then sell $40 of the S&P 500 and reinvest it into the NZ Bond ETF."


Boom. Hopefully by now that all makes sense, and you're ready to start your investing career. It's vital to remember though, if the value of your investment portfolio goes down, don't freak out and sell everything!

 

Where Should You Start Investing?


Obviously, as a teenager you don't wanna go into your bank or to a broker (social interaction, duh), and fortunately it's far cheaper and easier to do it online. You'll have to do a bit of research for yourself, because there are hundreds of trading websites out there, and a lot of them will do the exact same job. What's most important though is that you find a website which offers free trades. If you have to pay for every trade every week, even if it's only 1% you're losing valuable profit. Robinhood is a great place to start from what I've heard, but if (like me) it isn't offered in your country, try and find another website which has similar features. Plus500 is another good one.


Being a teenager, though, you may run into a problem. If you're under 18 you won't be able to open an account with any of these websites. In this case, you're gonna want to ask your parents or guardian if they can open an account and then open a custodial account for you - this means you can legally trade under their name and watchful eye.


If your parents or guardian aren't so keen on you trading online, your best bet is to open a demo account, which means you can trade, only the money you use isn't real. This is a great opportunity to learn the ropes though, and by the time you're 18, you'll be a master of the trade. Also, while you're waiting to turn 18, please read The Intelligent Investor, it's awesome.

 

So that's it. You now know the basics of investing - you're good to go! You know that the earlier you start, the more money you make. Recall that dollar cost averaging is wonderful in conjunction with index funds like the S&P 500 and bond ETFs. Remember to do your research and find an epic place to invest. So be free, time is money!

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