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What Should a 16-Year-Old Know About Investing to Get Started?
It’s never too early to start investing. In fact, when you start it at a younger age, you develop some good habits that could help you do well in the long run. So what do you need to know about investing to get started at the age of 16?
Learn investment basics
At this age, a great thing to do is to learn fundamental investment skills. Take time to read personal finance blogs, and check out Quora and Reddit investment sections. Get a copy of “Investing for Dummies” to get a scoop on investment planning.
The concepts that young investors often overlook are diversification and compounding. Diversifying simply means that you should hold a variety of investments that don’t move in tandem in different market environments. For example, if you invest in stocks, invest worldwide, not just in the U.S. market. You can further diversify by investing in real estate.
Compounding is the process where the value of an investment increases because the earnings on an investment earn interest (or dividends) as time passes. There is a rule in compounding called the Rule of 72, which calculates the approximate time over which an investment will double at a given interest rate and is given by 72/i. That means an investment that has an 8% annual rate of return will double in 9 years.
Answer these questions first: 1. What are your investment goals? 2. How do you define your success in investing? 3. What will you do if you don’t achieve your investment goals?
Be realistic about expected returns. Over the long term, 8 to 9 percent per year is about right for ownership investments (such as stocks and real estate). If you run a small business, you can earn higher returns and even become a multimillionaire, but years of hard work, and often times luck are required.
Save, plan and think long term
At 16, your savings are most likely relatively small. Unless you come from a wealthy family, living within your means and saving money are necessary steps to building wealth.
Think long term. Because ownership investments are volatile and risky, you must keep a long-term perspective when investing in them. Don’t invest money unless you plan to hold it for a minimum of three years.
Allocate your money and ignore the market fluctuations
How you divvy up your money among major investment categories greatly determines your returns. The younger you are and the more money you allocate for the long-term, the greater the share of equities in your investment portfolio should be. Be careful about expenses. The more you pay in commissions and management fees on your investments, the lower your portfolio return.
You should not pay attention to the short-term fluctuations of the financial markets. Ultimately, security prices are determined by supply and demand, which are influenced by thousands of external issues, expectations and fears, all of which are beyond your control.
Be careful about high risk stock picks; this is how many young investors lose their money, buying high and selling low. The large number of full-time, experienced stock market professionals makes it next to impossible for you to choose individual stocks that will consistently beat a relevant market average over an extended time period.
And don’t forget to ignore the speculators. Predicting the future is nearly impossible. Select and hold good investments for the long term (e.g., opt for low-cost index funds). Don’t try to time when to be in or out of a particular investment. And don’t bail when things look bleak.