Because You Asked: How Can Young Investors Get Started?

I’ve recently had the opportunity to meet with a few young adults in their early 20’s and a couple of teens who were eager to learn about how they could invest in the stock market, and what their investment options might be.  We had productive conversations and even briefly covered the Secret of Wealth– a demonstration about the “magic” of compounding. It essentially shows them that a little money invested early over a long period of time results in greater wealth than larger chunks of money invested later in life. They were pretty excited about that.

Even though these young people were excited about the potential of investing, and could perceive the benefits, there was still a bit of investor education that needed to happen, before they were ready to begin investing.  While I have a tendency to prefer written educational tools, I have learned that younger investors tend to prefer other formats such as video learning.

To that end, I started searching YouTube for some videos to share with them, and came across some pretty decent sources:

Then, I ran across an energetic and engaging young man by the name of Graham Stephan, who talked about investing, but also had some broad-based financial advice for young investors:

He covers these recommendations:

      1. Get a Credit Card that you use and pay off every month
      2. Get a Bank Account
      3. Get a Roth IRA
      4. Stay out of Consumer Debt
      5. Get a Job
      6. Live Below Your Means
      7. Don’t go to College Just to go to College
      8. Investing Advice for Teenagers

All of these are fairly consistent with our view and are presented in such a way to be accessible to younger clients, but we are awaiting feedback to verify.

Practical Questions- How to Get It Done:

A Roth Individual Retirement Account or A Custodial Roth IRA:

  • We strongly recommend a Roth IRA account for young people. We wrote in some detail about Roth’s in a previous blog: Because You Asked: How Is a Roth IRA Different from an IRA?
      • To open a Roth IRA, an individual must have earned income, meaning they must have some type of job that earns money.
        • Parents or grandparents can give your children or grandchildren money to invest in a Roth, but it cannot be more than they actually earn, and the maximum amount they can contribute to a Roth is $6,000 per year.
  • If the Roth account owner is a minor, the parent (or grandparent) must serve as a Custodian of the account until they are age 21 (in Texas), at which point they will move the account to their name only. It is termed a Custodial Roth IRA.  It is subject to the same limitations noted above.

Systematic Contributions:

If the account owner has a job and are contributing their own funds, we recommend that they set up Systematic Contributions: link a bank account to the Roth investment account, and set up an amount every month to transfer, just like any other bill, but paying yourself.  If they have consistent, earned income, they can start with an amount like $25 per month, drafted automatically, and gradually increase it until they are contributing the maximum permitted annually, or until they have an employer’s retirement plan to participate in.  (An individual cannot contribute to an employer’s plan and also to a Roth IRA.)

Where/How to Open an Account:

As a rule, we have a minimum amount of assets that we will undertake to manage/invest for our clients, but will make exceptions to that minimum for the children or grandchildren of existing clients.  For young people that do not have that opportunity, they can utilize on-line programs such as Charles Schwab, to get started with investing, with no account minimums and no commissions on stocks and ETF’s.  Individuals can also look at TD Ameritrade or Fidelity, and a newer site/app called Robinhood.

Complete a Risk Assessment: Whether utilizing an advisor or on-line brokerages, there will be some type of process for assessing an individual’s Risk Tolerance.  One might instinctively assume that all young people will have a high tolerance for risk, but that might not be accurate for everyone.  It is important for them to answer those questions, assuming they are of a maturity level to do so.  In the case of the custodial IRA’s, the custodian may provide guidance.

Select Investments: If an investment advisor is providing services, they will handle this question, but if not, utilize the research features on the investment program that you choose.  If starting with a limited amount, a practical recommendation is to choose one fund ETF or one index, such as the S&P 500. Then, this next step is crucial: Leave it Alone.

Leave it Alone.  You can continue to invest in the fund or investment of your choice with your systematic contributions, and you can choose to reinvest dividends, which we recommend.  Once your funds have had a chance to grow for a year or so, you may want to select some different funds, but only do it after doing your research.  For now, just pick something that matches your Risk Tolerance and I will say again, Leave It Alone. Warren Buffet says this:

“If you start young you don’t need risky investments in high-flying stocks. Make regular contributions to an investment account in which you own shares of high quality, low -risk stocks. Reinvest the dividends and let compound interest work its magic to grow your portfolio the slow-and-steady way.”

We hope that this gives you some information to consider for your children or grandchildren, as well as some info you can share with them.

 

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