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Four Tips for Young Investors

Written by Michelle Stoffel Huffman on July 16, 2014 in Retirement  |   No comments

Investing may seem like it’s just for the super-rich, but you don’t need a million dollars to start. In fact, you can start investing with a measly $1,000. If you have a job that offers a retirement savings plan, you’ve probably already started making some…

four-tips-for-young-investorsInvesting may seem like it’s just for the super-rich, but you don’t need a million dollars to start.

In fact, you can start investing with a measly $1,000.

If you have a job that offers a retirement savings plan, you’ve probably already started making some investments. The next step—investing on your own—really isn’t that scary, especially when you consider the returns you may be sacrificing.

“When interest rates were higher, by putting your money in a CD you weren’t sacrificing so much return—right now you are,” says Kathy Kristof, author of “Investing 101” and personal finance and investment writer for Kiplinger’s Personal Finance, CBS MoneyWatch, and Financial Planning.

For example, with an initial investment of just $1,000, monthly contributions of $500, and an average annual rate of return of 9 percent—about average for beginner investments, Kristof says—you will have almost $100,000 in 10 years, $340,000 in 20 years, and just shy of a million dollars in 30 years. The best part is that by the end of the 30 years, less than a quarter of that money will be from your own contributions. Much of the rest will come from the magic of compound interest.

“Compounding your interest over a longer time frame can supercharge your nest egg, so put your money to work as soon as possible,” says Jeff Reeves, editor of InvestorPlace.com and author of “The Frugal Investor’s Guide to Finding Great Stocks.”

Check your financial picture first

Before you take the plunge, Reeves recommends taking stock of your personal finances and budget.

“Do you have a decent rainy-day fund saved up in case of emergency? Have you paid off any high-interest debts, like that 14.9 percent APR credit card you ran up bar tabs on? If you don’t have a strong foundation, don’t jump the gun—worry about the basics first,” he says.

If you feel you can part with a few grand now and a few hundred every month, you’re in good shape to hit the investment road.

Invest passively

Many people pick out a few stocks and cross their fingers, but that’s the exact opposite route you want to take when you’re new to investing. Stick with passive, diverse investments that have a medium or low level of risk and that require little of your attention.

Kristof recommends mutual funds, dubbing them the “no-thought-required, easiest route.” Mutual funds are a diversified collection of stocks and bonds that are professionally managed. She also recommends investing automatically every paycheck, month, or quarter.

“You have better things to remember than investing, like your friends’ birthdays and what you want to do on Friday night,” she says. “For the investing side, do something that is incredibly simple that you set up once and forget about.”

While there are plenty of different kinds of mutual funds, Reeves recommends index funds, which replicate the performance of a board market, such as the S&P 500 or Dow Jones Industrial Average. These funds represent a broad and diversified investment with minimal fees, as you’re getting a little bit of many different companies.

“Why pick individual stocks and worry about the high trading cost and tax burden—in addition to the risk of picking the wrong stocks—when you can buy the entire stock market this way?” Reeves says.

Look for low fees

When you start investing at a young age, you want to look for investments with low fees.

“Those low fees are pivotal,” Kristof says. “You’re going to be paying them for such a long time that a half a percentage point is going to mean tens of thousands of dollars to you over time.”

Look for something with less than half of a percentage point if you can. Compare fees on different accounts and determine how those fees will add up over a decade or more.

Be patient

“For somebody who’s young and starting out, giving your investments time is the most compellingly wise thing that you can do,” Kristof says. “When you’re starting to invest at 25, you can invest little of your own money and still end up with an absolute fortune in the end.”

Unlike a savings account or CD, you don’t want to be pulling this money out in five years. Getting that first $100,000 is hardest, but after that the money piles on much more quickly, Kristof says.

Beyond letting your interest compound, you can also ride out market dips with more time to ensure you’re not losing money.

“The best investing strategies are not ‘get rich quick’ scams,” Reeves says. “A disciplined strategy of putting away a little bit each month and investing it with an eye on the long term is quite powerful if you have the patience to stick with it.”

Michelle Stoffel Huffman is a researcher and staff writer for Think Glink Media. Prior to joining TGM, Michelle worked for the Chicago Tribune as a daily news reporter and community manager, covering local government, business, tax issues, and crime. She now specializes in real estate industry news, consumer financial reporting, and home design and decor. She is a graduate of DePaul University in Chicago.

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