The teenage years are an excellent time to learn about investing, as there is plenty of time to experiment, save, and figure out one's own investing style. We asked four of our experts for the best investing lessons teens can learn, and here is what they had to say.
If teens realized what a huge advantage they have in the investing world, they would be ready to jump feet-first into the stock market. That advantage is time, and it is the most powerful weapon in an investor's arsenal, even for those who don't have much money to invest.
Many people think investing is for those with a lot of disposable income, such as established adults. But a 45-year-old adult, even if she makes a decent living, only has 20 years of earning and investing left before retirement, assuming she plans to retire at 65. A 15-year-old, however, has 50 years until he turns 65.
Let's look at an example that illustrates the incredible advantage teen investors have over their older, wealthier counterparts.
If a 45-year-old socks away $10,000 per year for 20 years and earns 10% annually -- roughly the stock market's average long-term return -- he will end up with about $630,000.
If a 15-year-old manages to save and sock away just $1,000 per year, for 50 years, earning the same 10%, he or she will end up with -- ready for it? -- $1.3 million.
The advantage of time in the market cannot be overstated. There are lots of other variables; not everyone earns 10% on average, so their results might be better or worse. But teens can greatly accelerate their returns by socking away larger and larger sums over time as their income grows. Your earliest invested dollars will have the most time to grow, so they're your most powerful. Start early and aggressively, and you may retire well before age 65.
The best investing lesson I could give a teen would definitely be to pay themselves first and making investing a priority.
If your teenager has a job, emphasize the importance of saving a certain amount out of each paycheck for the sole purpose of investing. It doesn't have to be a large amount -- say, 10% of their pay -- but it needs to become an automatic process. If he or she makes an average of $300 per paycheck, set up an automatic withdrawal for $30 at intervals that coincide with the paydays to be deposited into an investment account.
Then, every so often, make a point of checking the account together to show how much those little deposits can add up over a year. A $30 investment every two weeks adds up to about $800 over a year -- more than enough to pick a couple of stocks or ETFs to invest in.
And, as Selena pointed out, this amount of money can grow tremendously over 30, 40, or 50 years. Time is on your teenager's side, so by teaching them to invest early and often, you'll help them maximize time's powerful benefits.
It takes some effort to learn how to make your money work for you. Understanding the power of compound interest and paying yourself first, as Fools Selena and Matt advise, will get you moving toward your goal. But don't skip the step of learning how to invest. Investing without learning the basics is like jumping into the deep end of a pool without knowing how to swim.
There are many ways your money can earn more for you besides a regular savings account, such as in stocks, bonds, and mutual funds. But you'll need to understand something about risk, value, liquidity, and return on investment to avoid making a blunder. You might also want to create a fantasy account first and track different investments for a year. It's a good way to learn about investing without risking a dime of your hard-earned money.
If you're itching to take the next step, Selena's series on "Teens and Their Money" will give you further tips and tools to get started. Expanding your knowledge about the world of finance and business will help make sure the money you earn today will help you achieve your dreams tomorrow. Just stay dedicated; successful investing doesn't happen overnight.
Confidence and an appetite for risk are two defining characteristics of many teenagers -- and many unsuccessful investors.
In investing, it's important to be patient and avoid unnecessary risks. Want evidence that limiting risk is important to success? Look at the results of professional tennis players versus the amateurs: 80% of points in professional tennis are won by great plays, whereas 80% of points in amateur tennis are lost when a player overreaches and makes an error.
The extra time teenagers have to grow their money is worth more than the big returns they may or may not get from risky investments. It's better to start out with more predictable and straightforward investments, like food producer General Mills (NYSE:GIS), rather than a hot new tech company. Stodgy old General Mills might not be as sexy as, say, daily-deals website Groupon (NASDAQ:GRPN) was when it went public, but you really don't want your investment portfolio to look like a roller coaster.
Make no mistake: All investors make mistakes, and that's OK, because we learn a lot from those mistakes. The important part is to limit how big and how frequent your losses are.