The fourth in the series of things you did NOT learn in school about managing your money, but really need to know for life. This time around, we’re looking at investing. Of course, because a major portion of The Amateur Financial’s coverage has always been about investing, this time, we’re going to look specifically at some of the advice you should heed if you are young and have time on your side.
The Lesson
Alright students, settle down. Today, we’re going to be talking about investing. There are probably as many books out there on investing as there are on all the other topics we’ve covered in this course, and there are nearly as many different investments as there are books. Trying to cover even a small fraction of the stocks, bonds, mutual funds, and real estate investments in the world would easily take up all the time we have for this class as well as all the time you’re going to spend in this high school altogether. That’s why, rather than trying to turn this course into Investing 101, we’re instead going to cover a few general principles of investing.
The first thing to remember about investing is to start early. You might be tempted to think that just because you’re still in high school, you’re too young to worry about investing. The longer you stay invested, the more time your money will have to compound, meaning more money for you when you retire. Compound interest is your best friend when you have decades before you will need the money.
You also want to be sure not to take too little risk, especially when you’re young. It’s tempting to put your money into savings accounts or low yielding money market funds, especially at times like we are currently experiencing, filled with fear and doubt about the future. It certainly feels safer to have your money somewhere it will not lose value; but inflation will slowly eat away at the real value of your money. You’ll also miss out on the growth potential offered by ‘riskier’ investments that offer greater returns, like stocks.
Let’s put this into more concrete terms, so you can see how time and risk (as measured by potential returns) can benefit you. Take a look at this chart:
The growth of $1 over time
This table shows the growth of one dollar from the listed ages until you reach 65, the standard retirement age. It also shows how the returns on your investments effect the final total. A six percent return is fairly conservative, and is achievable with a primarily bond portfolio, while a ten percent return reflects a portfolio of all stocks. Eight percent is a reasonable return for a balanced fund, or a mix of stocks and bonds. If you want to figure out how much an investment of more than one dollar will be worth, simply decide how much you want to invest, and multiply that dollar amount by the appropriate figure in the table to determine how much your investment will be worth.
Two things I want you to notice about this table. First, the younger you are when you start investing, the greater the time your investments will be able to grow and the more money you will have when it’s time to retire. Begin investing at eighteen, and you’ll have more than ten times as much money as you would if you started investing at sixty. Second, the younger you are when you start investing, the more time your money will compound, and the greater a difference the return you get on your money will make. If you start investing at fifty, a ten percent return leaves you with less than twice the amount of money of a six percent return. However, start investing at the tender age of eighteen, and taking a bit more risk to achieve a ten percent return gives you nearly six times as much money as you would get with a six percent return over the decades. Taking on some extra risk is a winning gamble, especially when you are young.
A third tip: when investing, follow the advice of Jim Cramer (for this particular piece of advice and few others) and think about your investment money in two different piles, the retirement pile and the discretionary pile. The retirement pile should be invested with an eye on preserving it for the future; while you can (and should) attempt to maximize its growth while you are young, by investing in growth vehicles like stocks, you shouldn’t try to shoot the moon with your retirement fund. Instead, invest in nice, steady mutual funds, which are unlikely to go bankrupt or otherwise destroy your retirement fund. For the discretionary pile, you can take more risk; as long as you are using money you don’t need for another purpose, such as retirement savings or living expenses, you can speculate with your discretionary money without adversely affecting your life, and maybe, just maybe, succeed with making money fast(er than other people).
Finally, be careful who you turn to for money advice. There are many good sources of advice out there, from books and magazines to financial advisers and even some well-written, highly impressive blogs. But there are also many sources of financial information that are incorrect at best, and downright dishonest at worst. Watch out for false information of all types, as you are the person who will care the most about your finances. If something sounds too good to be true, like a promise of returns on investment far in excess of the typical returns for that asset class, it probably isn’t a real opportunity. If you take nothing else from this class, be vigilant and skeptical in your investing life.
*Bell Rings* That’s it for now, students; enjoy the rest of your classes, and be sure to make good financial decisions in life!
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