Investing Cheat Sheet for Youth

By: David Gatchell, author of The Financial Empowerment Handbook

And Matthew Shadid, co-founder of Gen-Z for Financial Literacy

August 2024

I’m frequently asked about investing by young people. Many people start off thinking that investing equates to buying stocks, is super glamorous and is mostly for the rich. Not true. Lets dig into a few basic details everyone needs to understand.

1. Asset Classes - different types of investments, risk profiles, earning potential etc.?

Investing isn't just about buying stocks. Diversification — spreading your money across different asset classes — can reduce risk. If/when one investment performs poorly, others balance it out, minimizing potential losses.

• Stocks: These are parts of real companies, you’ll own a part of any company that decides to put those parts up for sale. Its fun to buy shares of your favorite company (AAPL, TSLA, etc) but there are a LOT of well run, profitable companies you’ve never heard of. A stock can 10x it’s value, it can also go to ZERO! Owning puts you in a position of power, you can vote in company decisions.
• Bonds: Bonds are just letting a company borrow some of your money while charging them a price for using your money. Safer than stocks and provide regular income.
• Mutual Funds and ETFs: A mix of stocks, bonds, or other assets, providing diversification.
• Real Estate: Generate rental income and appreciate over time.

2. Risks - all investments come with some risk

There are different types of risk, including that associated with the market, credit, liquidity, and inflation. Key to understand for new wannabe investors is that any investment has risk, which means you can lose money!? - What is your risk tolerance?

3. Compound Interest - your best friend in investing

The earlier you start investing, the more time your money has to grow. Compound interest means you earn returns on your returns, leading to exponential growth over time. $100 at 10% yields $110 after the first year. Second year you take $110 at 10% for a total of $121. Next year $133, $146, $161…. On and on… While the results of compound interest may look inconsequential the first few years, the benefits come over the long term, 10, 20+ years.?

4. When to Invest - how critical is timing

Many people try to time the market in order to buy low and sell high, the cornerstone of successful investments. Timing the market, however, is not a responsible, long-term strategy, its a gamble. Just as many fortunes have been lost as earned with this approach.?

Alternately, consistent investing of a fixed amount regularly, regardless of market conditions can reduce the impact of market volatility over time. Often this is called Dollar Cost Averaging.

5. Continual Education - keep on learning

The financial world is constantly changing. Continuously educate yourself through books, courses, and reliable financial news sources.

6. Don't Fall for the Hype - be skeptical

Not every hot stock tip or investment trend is a good idea. Do your own research and invest based on sound principles, not emotions or peer pressure.

Final Thoughts

Investing is a powerful tool for building wealth, but it's essential to go in with your eyes open. Understand the basics, know the risks, and continually educate yourself. Start small, stay consistent, and remember that investing is a long-term journey.

Disclaimer: This is not meant as investing advice. Always consult a professional before making any investment decisions.

Published by: Four Gifts Publishing, 2024