Investing is a great way for teens to grow their wealth over time. By starting early, teens can take advantage of compound growth which is the process of earning interest on both the initial investment and any accrued interest. To get started, teens can consider opening a custodial account which is a type of savings account that is managed by an adult until the teen turns 18.
One popular way for teens to invest is through index funds and ETFs (exchange-traded funds). These types of investments allow teens to diversify their portfolio by investing in a broad range of stocks or bonds. Fees are an important consideration when investing in index funds and ETFs, as they can eat into returns over time. Teens should look for funds with low fees to maximize their returns.
Understanding risk and return
When investing, teens need to understand the concept of risk and return. Generally, investments with higher potential returns come with higher levels of risk. Teens should consider their investment goals and time horizon when deciding how much risk to take on. For example, if a teen is saving for a short-term goal, such as a car, they may want to take on less risk and invest in a more conservative fund.
Automatic contributions and fractional shares
To make investing easier and less intimidating, teens can set up automatic contributions from their custodial account. This way, a fixed amount of money is invested at regular intervals, such as monthly. Additionally, many brokerages now offer fractional shares which allow teens to invest in a portion of a stock or ETF rather than having to buy a whole share.
Creating a starter plan
To get started with investing, teens can create a starter plan that outlines their investment goals and timeline. For example, a teen who wants to save for college in 5 years may allocate 60% of their portfolio to stocks and 40% to bonds. A teen who wants to save for a long-term goal, such as retirement, may allocate 80% of their portfolio to stocks and 20% to bonds. By starting early and being consistent, teens can set themselves up for long-term financial success.
