Four Steps for Teens Who Want to Test the Investing Waters
Teens who feel ready to try their hand at investing should first get educated, with adult supervision, and then it’s all about diversify, diversify, diversify.
Being a first-time investor can seem a bit intimidating and unnerving, but the sooner you dip your toe into the waters, the better! And remember to ask yourself, would you swim in the ocean during choppy waters with no lifeguard on duty? No, right? (If you said yes…let’s talk.) Your parents or other trusted adults, such as an older sibling, a teacher or a friend’s parent, should be involved in the process to help guide you and make sure you are making safe and smart choices.
Here are four ways to successfully start investing as a teenager and not be frightened off.
1. Get Educated: Learn the Basics of Investing for Teens.
Investing is the process of making money through a financial asset, like stocks and bonds. Learning how to invest your money as a teenager is a great way to set yourself up for a life of financial growth, as your money will grow over time and compound interest, allowing you to earn more on what you already have.
However, there are some barriers to investing for teens. The best way to get started with investing is to open an account at a brokerage firm, but teens aren’t allowed to have their own accounts due to age requirements. A common alternative is to have a parent or guardian open a custodial account, which transitions to your name once you turn 18.
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2. Evaluate Your Investment Options.
There are many options that exist for teens to start investing. One of those is investing in the stock market by buying shares of an individual company. If you choose to invest in the stock market, you’ll want to make sure that you understand what you’re investing in and, most important, ask yourself why. Investments should align with your goals and risk tolerance. Using a financial education app like Invstr can help you identify potential risks, follow news, performance trends and see community comments on the stock.
If you don’t want to invest in the stock market, another option is to invest in real estate. There are many different ways that a teenager (beginner) can invest money in real estate or other tangible assets. These types of investments are also historically known to be a good hedge against inflation and are considered “recession-proof.” This is important to think about as we come head to head with an impending recession.
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3. Diversify, Diversify, Diversify.
The next step in your investment journey is to make sure that you are continuing to diversify your portfolio. This technique helps reduce the overall risk to your portfolio and also helps you build a balanced portfolio and better weather downturns in the markets.
Diversification can be done in a number of ways, such as investing in both stocks and bonds, which are both considered good options, as they both have different types of risks associated with them (for example, there is an inflation risk for bonds, and stocks have company-specific risks). Tools like Invstr’s Portfolio Builder can help you diversify based on your risk preference.
The main reason why you want to diversify your portfolio is because it ensures your best chance to avoid major losses. Different types of assets don’t all respond in the same way during periods of financial market uncertainty, and diversification helps mitigate this. For instance, during periods of volatility, bonds are generally more stable in the short term than stocks.
Diversification is key!
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4. Practice and Ask for Help.
Practice makes perfect! Investment gamification can help with this, as it’s fun and engaging and makes it easy to learn about personal finance and investing. One option is to create or join an investing fantasy finance league, of which there are several and allow budding investors to compete with friends and practice trading and investing without risking real money.
The sooner you start learning how to invest, no matter how old you are, the better. The time for investing and setting up for financial success starts today!
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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