Aim to Do Better Than Average
Most people in America increase their wealth by less than 10% or so each year, on average. Most either don't invest at all or are invested in poorly selected stocks or mutual funds that don't perform as well as people expect them to. (Sadly, millions of Americans are heavily into the opposite of investing -- gambling on lottery tickets and owing thousands of dollars on credit cards.)
You can top all those people -- just by being average. Invest in an index fund that keeps track with the overall stock market (either an S&P 500 index fund or a "total market" index fund based on the Wilshire 5000), and you'll earn a return that roughly matches the market. In a strange way, you'll be above average by being average!
That should be good enough for most people, including you. But if you want to do even better than average, you can try to find a mutual fund that you're pretty sure will do better than the stock market average. (Here are a bunch of funds that look good, although none offers any kind of guaranteed return.) Or, you can invest some of your money in individual stocks. You can do very well investing in companies familiar to most people. Take a gander at the following table that shows the average annual growth rate of stock in a bunch of companies over the last two decades. (The overall market grew by almost 16% during these 20 years. It was a period of above-average growth.)20-year Average Annual Returns (1980-2000)
|Company||Ave Annual Returns|
|Johnson & Johnson||18%|
|Procter & Gamble||16%|
$1,000 invested in General Electric stock for those 20 years would have grown to $38,000. And $1,000 in Wal-Mart would have grown to around $222,000. These amounts don't even include dividends. So should you rush out and put all your money in Wal-Mart stock? Not at all. The next 20 years might be different from the last 20 years for these firms. Wal-Mart probably won't grow as quickly in the next 20 years as the last 20 years. That's why it's important to develop some skills in selecting companies. During the same 1980-2000 period, the average annual growth rate was 9% for Sears, 8% for IBM, and negative 4% for Xerox. A well-known name is not enough.
If you want to learn more about investing in individual stocks, plan to keep learning. It's not rocket science -- you can learn to do it, if you want to. And you may very well find that you really enjoy it, too!
If you haven't yet read our book, The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of, consider doing so. It goes into much more detail on how to invest in stocks (as well as many other important financial topics). You can also learn a lot about investing in stocks at our website, in our other books, and also in books by Peter Lynch. Another article here in our teen area lists lots of resources for learning more.
If you have questions about anything you've read here, you can ask them on our Teens and Their Money discussion board. Or just stop by to see what other teens are saying.