Harness the power of your investments by starting to invest young. There are simple stock market investment vehicles that will allow the inexperienced investor to achieve solid, long-term, returns without having to be a stock market expert.
Importance of Investing Young. It is essential that you start investing young; if you don’t your actually losing money and missing out on the most important thing young investors have in their favor ‘compounding interest’.
Each year that you have money and are not investing you’re losing about 3% of its value due to inflation. So after 10 year of sitting on $100 cash it could be worth less than $75. What’s more, by investing young you benefit because the money you made from your investments – make you more money. Making money from money you’ve already earned from your investments is known as ‘compounding interest’. This powerful force can make you a millionaire well before retirement age with saving as little as $70 per month.
Now that you know you need to invest; how do you start? The stock market offers a great place for young investors to get their money working for them; the good news is that you don’t need to have a ton of money to start. Plus, with the investment vehicle discussed in this article, you don’t need to be a stock market expert to begin.
What’s the solution? An ideal investment for young and inexperienced investors is to get on the road to financial independence are low-cost broad market index investments. Warren Buffet states, “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.” Reduced risk, solid returns and it one of the simplest investments you could make. An added bonus is that it takes only minimal knowledge and about 60 minutes to start getting your money working for you.
What’s a broad market index? A broad market index is a group of stocks that you can purchase as one. It allows young investors to buy a collection of top performing stocks that mimic the performance of the entire stock market. Since these index funds allow you to earn returns similar to the overall performance of the market it greatly reduces the risk. This is an advantage to the beginning investor since it is safer than investing in a single stock or some mutual funds; plus there is a history of double digit returns.
Broad based index investments may not sound like something you know; however if you ever watch the news chances are you have heard of this investment. -The Dow Jones Industrial Average index contains 30 top industrial stocks. -The Standard & Poor’s 500 contains 500 of a variety of different stocks. -The NASDAQ 100 contains 100 stocks that are mostly in the financial and technology sector.
When you invest in a broad based market index you actually own a small piece of each individual stock. For instance, when you invest in the S&P 500 broad market index, you’re buying a piece of all 500 stocks in that index. So for each S&P index share that you own your actually own 1/500th of companies like: American Express, Google, Ford, Nordstrom, Home Depot, Staples and Yahoo to name a few.
For those young investors that don’t want to stay glued to their computer all day broad based market indexes are great solution. Since this investment matches the overall return of the market if you believe over the long-term the stock market will continue to rise in value this could be a good investment. If history were an indicator of future performance, it would be clear that over time, you would generate solid returns. The key benefits associated with broad market index investing are:
1) Higher Returns – According to Standard & Poor’s, less than 30% of managed funds in 2006 beat broad market index investing. What’s more over the last ten years the average person that invested in broad based index funds has beaten the returns of most mutual fund investors.
2) Added Diversification – Diversification lowers risk. If you invest in one individual stock and bad news comes out on the company you could loose a lot of money fast. Now, for instance, if you’re invested in an S&P 500 index fund and one stock has bad news you really don’t care. That will only affect your investment one five hundredth.
3) Lower fees – Index funds fees are typically lower and are often around.5%. While the average mutual funds fees are around 2%. Over time this will make a big difference in your overall return.
4) Passive investment – When investing in individual stocks or mutual funds it is important to keep your eye on the market and up-to-date with current trends. Investing in broad based market indexes takes less stock market knowledge and requires less time to track.
The earlier you start investing the sooner you can reach financial freedom. invest with broad-based index funds that have similar returns to the overall market, because then we are receiving similar returns while hedging our portfolio – again, investing for young and beginning investors is all about diversifying to improve your chances for financial success.
How do I invest? There are two ways for young investors to begin investing in broad market indexes. Both are similar in their returns; but they are different in how the index is bought and have different fee structures.
* An Index Fund is a mutual fund that purchases the stocks that make up an index in order to match the returns of the overall market. For example, if investing in an S&P index fund, that mutual fund would own all the 500 stocks that make up that particular index. Index mutual funds may require a minimum investment, but some can be waived with a direct deposit investment plan that automatically invests money every month from your account. Typically, fees on index funds are higher and there are minor restrictions on when you can sell.
* An Exchange Traded Fund (ETF) is similar to an index fund, with the benefit that ETF’s can be bought and sold similar to an individual stock. An illustration of an ETF is the “Spiders” (American Stock Exchange: SPY symbol). Each share of a spider contains one-tenth of the S&P 500 index, and so trades at roughly one-tenth of the S&P price. The management fees on ETFs are low. There are less restrictions on the sale of ETF’s when compared to broad based index mutual funds.
Young investors will achieve similar returns whether investing in index funds or exchange traded funds, but typically ETFs have lower fees and fewer restrictions.
The earlier you start investing the bigger advantage you will have. Because there is only a minimal amount of money necessary to start and a low level of knowledge needed to invest – broad based market indexes will allow you to start investing young. So quit working for every dollar and get your money working for you.