Sometimes I look back on my past as a young investor and want to kick myself. I didn’t really know what I was doing back then, and made a number of mistakes that cost me money in the long run.
I did learn a lot and truly enjoy investing and saving now. But I wish I could go back in time and offer my younger self a few bits of advice. Here’s my list of investing tips to the “young me” that’ll hopefully spare you the same mistakes.
1. Understand the Value of Compound Returns
Retirement is one of the last things you’re going to think about when you’ve had hardly any time in the workforce. “What? Retirement? I’m only 22!” As crazy as it sounds, investing money in these early years is a crucial part of having a large nest egg upon retirement. The earlier you start investing, the more time that money has to grow. And with a long time horizon, you don’t have to be overly concerned about the ups and downs of the market.
2. Familiarize Yourself With Retirement Accounts
If you have some money, it may be tempting as a young person to simply open a brokerage account and begin buying and selling. But it’s important first to understand the basics of retirement accounts and the advantages they offer to investors. Individual Retirement Accounts (or IRAs), along with 401K plans can allow you to save for retirement and get great tax benefits along the way.
3. Don’t Buy That Thing — Invest Your Money Instead
I cringe when I think about the useless stuff I bought when I was in my teens and twenties. Articles of clothing, music, movies, computer games, expensive meals with friends… I had a lot of fun, but I could have had as much fun living more frugally, and I think about how much money I’d have now if I’d bought stocks, instead. Even a small amount of money placed in an index fund at age 18 has the potential to grow into a substantial sum. I wish I could go back and tell my young self to put at least some of my spending money in an account that would build value for my future self.
4. Reinvest Those Dividends
As a young investor, I used to get dividend checks from companies that I owned shares of. And frequently, I would use that money to go and treat myself: a movie, a dinner out, a trip to a ballgame, a new pair of jeans. Little did I know that I could have used those dividends to easily buy more shares of a stock. Imagine the growth in a portfolio that is not only seeing share price growth, but an increase in the number of shares. This is also a great way to practice dollar cost averaging, because you are using dividends to buy more shares as prices fall and fewer shares as prices increase.
5. Don’t Panic
When you are a new investor, it can be a startling thing to see stock values drop. It’s very tempting to pull your money out of the markets when you see your investments lose value quickly. But I look back now on stocks that I sold in a panic, and really wish I had held onto them, as they all would have quickly rebounded in value and made me money over time.
6. Stop Checking Your Investments Every Day
Investments go up. They go down. They go up again. Tracking them each day really serves no purpose, and will only stress you out. By checking your portfolio only once a week or so, you’ll be less tempted to buy or sell based on an emotional reaction to the market movements.
7. Don’t Try to Pick Stocks
Admittedly, it’s fun at first to pick a company you are familiar with, buy some shares of stock, and watch how they perform. It’s actually not a bad way to get comfortable with how the stock market works. But if you want to make money long-term, trying to create a portfolio of individual stocks will ultimately be ineffective and perhaps even frustrating. You’re much better off as a young person placing the bulk of your money into an index fund that tracks the S&P 500 or total stock market. This will generate solid returns for years to come, and will require a lot less work.
8. Know What You’re Investing In
I remember when I first began putting money in a 401K, and had the option to invest in a number of different mutual funds. I spread my money evenly across most of them, believing that it was a path to diversification. After some time, I began to research the holdings of each fund, and realized that many of them invested in the same big companies. It turns out that I wasn’t “diversifying” at all. The lesson I learned is that before you invest your money, have a good idea of what you are investing in. Learn how to read mutual fund prospectuses and earnings reports.
9. Learn About Commissions, Fees, and Taxes
When I first began investing, I opened an eTrade account, invested in a few stocks, and left the account alone. About a year later, I got $50 deducted from my account for “inactivity.” Then I exacerbated the problem by selling the stocks in a panic and then incurring short-term capital gains taxes. Brokerage companies try to be transparent about fees and expenses, but it’s up to the investor to understand that it costs money to buy and sell stocks. Mutual fund managers will take a cut of every dollar you invest, and there are tax implications every time you sell. None of this should be a deterrent to investing, but young people must have a good grasp of how it impacts the performance of their investment portfolio.
10. Take All of the Company Match
At my very first job, I invested money in the company 401K plan, but didn’t feel like I was earning enough to reach a full company match. (The company matched contributions of up to 5% of salaries at the time.) Looking back, I realize that I probably left thousands of dollars on the table because I was too conservative. A company match is free money — you should always take it if you can. Those extra dollars could add up to a significant amount of money in your retirement account over time. Plus, the match encourages you to save more of your own money, and that’s never a bad thing.
11. Don’t Get Too Excited About Company Stock
Many companies offer company stock as part of their retirement plans. This is a nice perk, but young people in particular must understand that it’s dangerous to put too much stock in their portfolio. Consider the plight of many Enron employees who lost nearly all of their retirement savings when the company went bankrupt in 2001. It’s okay to keep some company stock, particularly if it’s provided to you for free or you are allowed to buy it at at a discount. But make sure it comprises just a fraction of your overall portfolio. Having too much of your savings tied up in one stock — particularly one that is already responsible for your financial wellbeing — is dangerous.
Source: 11 Investing Tips You Wish You Could Tell Your Younger Self