How should a Young Person Invest Money?

It’s never too early (or too late) to start saving and investing but it’s important to understand how and where to invest before getting started. The young usually find investing daunting. Most investors invest in stocks as an additional source of income to increase earnings, to beat inflation or to arrange money for their school, retirement, to buy property etc.

The more you understand investing, the better you will perform. Following are some pointers that you should learn early in your life;

1- The interest you earn on saving accounts is very little as compared to what you can earn by investing it.

2- Retirement savings when invested in funds like IRA or 401(k) earn interest at a better rate than saving accounts

3- Without investing, your savings can not beat inflation. Inflation on an average decreases value of your money to about 4% every year. It is important to invest your money at a rate greater than inflation.

4- Hope for the best when you invest but be prepared for the worst. There is risk involved in investing and it is possible to lose some or all of your money.

5- Securities are financial instruments that can be classifies in to debt and equity securities.

6- When you buy a share of a company, you own a part of the company.

7- Frankfurt Stock Exchange, London Stock Exchange, SIX Swiss Exchange and Euronext Exchange are major stock exchanges of Europe, while NYSE and NASDAQare major American exchanges. Stocks are traded on exchanges, which make up the stock market. Before investing in the stocks, it’s a good idea to observe the trading activities of an exchange to learn how it works.

8- Understand the difference between stocks and bonds. Bonds are debt instruments while stocks are equities. The issuing authority of the bond is entitled to pay you interest (usually monthly) throughout the period and then pay back the price of bond after a fixed period of time, along with the final interest payment.

9- Instead of buying a single security make a portfolio and diversify it to mitigate risk by owning an assorted range of investments.

10- Keep monitoring how much the investment is paying you back on your money. Calculate Return on Investment (ROI) by dividing investment’s return by its costs.

11- Learn about a range of wealth managers/investment advisors and compare their fees and then hire an appropriate professional for your investment portfolio. Financial advisors, brokers and planners vary a lot in their services and fee structure. You will need to find the right one - best services at affordable fee - yourself.

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12- Once you’ve selected your investment advisor, your burden of researching stocks will shift on them. They are now responsible to suggest you mutual funds and stocks and the potential of growth they see. You can decide and pick the best securities from the pool they suggest.

13- Learn about the taxes you will have to pay once you start making profits. Learn how and when to pay taxes on your capital gains.

14- Learn about any tax breaks you can avail. Each account is different from others in terms of tax structure. Check if you are eligible to get contributions from government on your college fund or on your retirement plan.

15- Hope for the best returns on your investments but be prepared to suffer any unexpected losses.

16- Don’t invest in the stock that everyone is talking about without research. Don’t just follow others. Do your own research about the company and the stock and then decide.

17- IMPORTANT: Your long term plans should not change with rumors spreading in the market. Don’t buy/sell based on rumors and news headlines.

18- Listen to your professional advisor. Don’t stick to a particular stock only because it has performed well in the past. It’s a trap many novices fall for.

19- Stock markets are volatile and so are the individual stocks. They go up and down every day. If you have invested your money for a longer period of time, don’t get upset with small price movements. As a long-term investor you don’t have to monitor your stocks every day.

20- Don’t invest all your money. Keep some cash or highly liquid securities for emergencies. Keep enough funds enough to cover your next 6-12 months expenses in case of a market crash.

21- No one can predict the market. Some research based guesses can be true but keep in mind that predictions can turn out to be the exact opposite.

22- Learning is a life-long journey. Never delude yourself into thinking that you know all about the market. Many such ‘experts’ make a fool of themselves in the end.

24- It is better to hire a professional advisor to manage your portfolio. There are many financial planners, wealth advisors and now robo-advisors (Ways2Wealth is a free robo-advisor) available to serve you better than you can serve yourselves.

WHY IT IS IMPORTANT TO INVEST YOUR SAVINGS?

It creates wealth for you. Stocks on average have returned more than 9% return on investments in the past years. If you invest $5000 for 15 years, with an average rate of return of 9%, you will receive $18212 at the end of 15 years (calculated using compounded interest). Great return on very small investment.

INVESTING OBJECTIVES

There can be many goals depending on what you want, but some common ones are:

• Your college fee or your children’s
• Funding your retirement
• Inheritance
• Buy some property
• Luxurious vacations
• Simply having a big bank account/becoming wealthy

HOW MUCH SHOULD I INVEST?

That varies, but as a general rule, invest as much as you think is appropriate and you can easily save. Most economists and financial advisors recommend to save at least 8%-10% and to invest at least 4%-6% of your income every month. It’s important to start saving as soon as you start earning even a very small amount. When you make a habit of saving some amount every month, it may not look beneficial in short term but it will have a good impact on your financials in the long run.

INVESTMENT TYPES

There are countless ways in which you can invest. Here are some important ways, most of which can be done via your financial advisor or online broker.

1- Stocks: When you buy stock of a company, it gives ownership of the company to the extent of the number of stocks (also called equities) we own. Stocks are more volatile in nature as compared to other investments. Stocks have a history of high returns in the long run making them an attractive investment. They are suitable for young investors. Examples are Nestle and Novartis

2- Bonds: Bonds are fixed income investments that are known to give returns to the investor in a stream of payments. Bonds are usually bought for tenure of 5, 10, 15 and 20 years. They offer a stable but lower rate of return to the investors. Bonds are more suitable for older investors.

3- Cash: Certificate of Deposit, money market accounts, saving accounts are example of highly liquid investments which can easily be converted to cash. These investments carry low risk and give low return to investors. Avoid investing in this type of investment unless you think you will need your money back very quickly in future.

4- Mutual Funds and Exchange Traded Funds (ETFs): This type of investment invests money in the form of portfolios of different stocks, bonds etc. that offer different level of risk and return. Examples are Vanguard European Stock Index and iShares MSCI EMU

Diversification reduces risk by offsetting poor performance of one asset class with the one with superior performance while the portfolio is protected against volatility. It’s important to select the right asset allocation strategy to balance risk against return by allocating assets according to your financial goals, risk tolerance and investment horizon.

METHODS OF INVESTING

• Selecting stocks, bonds and mutual funds that are actively managed and the investor aims to beat the market is called active management. If you can spend time and effort on researching and learning about the stocks and markets, active management is appropriate for you. Please mind that it’s demanding and definitely not for everyone.
• When the investor’s goal is to match the market’s performance by tracking an index or fund, it is passive management of investments. If you think you cannot spare time for your investments, better to track an index that gives good returns with less risk potential.

SELECTING THE APPROPRIATE STOCK

It’s fundamental to all investors to recognize how dissimilar investing is from speculation. An investment is not based on quick judgments, it’s a decision that should be taken after in-depth research to know how to accomplish long-term sustainable profits. Speculation, on the other hand, is a gamble.

For new investors, ETFs and mutual funds are a good investments to start with. ETFs are generally cheaper and more flexible than mutual funds. When selecting stocks better invest in companies you are familiar with. Go for businesses with some competitive advantage over others. Companies with strong management, low debt and good history of stock profits should always be your first choice. Look for growth potential in the stock, diversify to mitigate and manage risk.

TIME TO START

When you have successfully gone through all these steps, it’s time to open a brokerage account to help you start investing. A broker or a professional financial advisor, that helps you in selecting the best stock, charges a minimal fee, gives you the best investment advice and answers all your queries will be the most appropriate candidate for this job. Select your brokerage company cautiously and start investing.

THE YOUNG AND IMPATIENT

Professionals recommend starting savings early to get the maximum benefits of compounding, but the idea is not so practical for those who are earning little amounts in their young ages. People in their 20s have different goals compared to older people. Youngsters usually save money to pay for college, to buy a new car or to go on a trip with friends. Reducing expenses will increase savings. Making a budget prior to spending will help you save good a amount. These are short term goals that develop the habit of saving and investing from an early age.

• Set goals and objectives for your savings. You will probably set short-term goals anyways (talking from experience) but don’t forget to set aside some money for the long term.
• Estimate the time when you will need your money to understand how much you need to save and when
• Sometimes it’s not easy to estimate timelines for some investment goals like marriage or having children. In that case try to arrange money in advance.
• Young investors usually spend cash earlier than planned since they lack patience (fancy a new car or can’t resist going on a trip). You can invest in savings account that pays higher interests and charges no fee for maintaining it.
• Finding the perfect mix (read portfolio optimization) in your investment portfolio according to your risk appetite is crucial. If you can handle more risk, you can invest in equities carrying higher risk with higher return on your investment.
• For risk averse investors, the return is stable but small on investments like Certificate of Deposits, Treasury Bills, Money Market Funds, and European Bonds etc.
• If you’re young and inexperienced it’s not necessary to actively trade in the market. Better to buy-and-hold dividend paying stocks.
• Mutual funds and exchange traded funds are better choices over individual stocks. They give small weights to each type of investments that helps to lower the risks associated with the investments. ETFs and mutual funds can be purchased with small amount of money. iShare Core MSCI Europe ETF and Vanguard FTSE Europe Index are two European funds that performed well in the past years and are expected to continue to grow.
• It is always good to invest in stocks in your currency as well as in some international ETFs to contain loss if your domestic market collapses. Canadian and U.S. markets can give better opportunity to investors who want to invest in other currencies. BMO aggregate bond Index ETF (ZAG) is a Canadian ETF that holds both government and corporate bonds and is highly diversified.
• Look for ETFs that charge lower fees or sometimes no fees. This will help you save money. Funds that have lower expense ratios are better investments.

Starting your investing journey will also develop good habits such as not spending on useless things. You have more time to earn and cover a loss (if you incur) as compared to old investors. Increase your contribution every year, especially when you get a raise.

General Advice from Jack Bogle

Bogle is a successful entrepreneur, also the founder and Ex-chief executive of Vanguard, which has $4 trillion of assets under management. In his many interviews he shared how he fought with his heart disease and arrhythmia and survived heart attack at the age of just 31. With all his diseases and ill health conditions he worked as a warrior for his company and brought it to where Vanguard is today.

Bogle suggests the following to investors to be successful in this challenging world;

1. If you want to be a successful entrepreneur, you ought to take risk. High risk returns high reward. If you want to be an entrepreneur, you have to input all capital to the business to be successful including a major part of your personal savings. The entrepreneurship is risky, if its unsuccessful, your loss is huge but if you succeed, the reward is even bigger.
2. Work as hard as you can. Never let anything stop you from working hard. When you work hard, life becomes easy and when you don’t, life becomes tough. Hard work is the key to success in any aspect of life. Be a fighter, a warrior in tough times and never become a lazy person.
3. Find the right company for yourself and get in. Don’t care if the job does not suit your qualification and expertise. Once you enter a company, you can easily discover if an appropriate opportunity arises for you. The innovation in technology has made it easy for people to set up new companies that frequently replace their employees.
4. Young investors should invest in low fee index funds in the beginning. Invest 75% of your investments in stocks and get stock market return on them. Save and invest regularly to get a good amount at the end.
5. Hire a robo-advisor to get advice on your investments because they are cheap and the automation allows them to give better solutions than financial advisors. But if you feel comfortable with traditional advisors, it’s a matter of your own choice.
6. Never lose hope in any matter of life. Keep fighting for your health, your personal life, your job, your business or any other thing that’s important to you. When you are about to lose hope, take a deep breath and start all over again.

Best!