For young or inexperienced investors choosing a stock or
mutual fund can be confusing. What's more unless you have
professional training, investing in either stocks or mutual
funds could be too risky. Fortunately, there is a simple
investment you can make without having any experience in
the stock market.
Importance of Investing Young. It is essential that you
start investing young; if you don't your actually loosing
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
loosing 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 best part is you do
not need a lot of money to get involved. 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." This is one of the easiest
investments you can 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.
Although the term 'broad based index investing' may sound
unfamiliar you already know many of these investments.
-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.
Broad market indexes are ideal for young investors that
don't want to watch the stock market everyday. 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 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. On the
contrary, index fund investing requires minimal time to
track investments and less knowledge.
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. In addition, there are
fewer restrictions on the purchase and sale of ETF in
comparison to 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.
----------------------------------------------------
Vince Shorb, young America's success coach and leading
financial literacy advocate shows young adults how to
invest young so they can retire young. For more information
on his latest course 'Financially Free by 30' and a free 5
step video course visit http://www.FreeBy30.com now.
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