What every High School student should know about investing
Knowing how to invest is very important
The world has changed a lot in the last fifty years. There was a time when a person most often a young man would go to work for a company and work for that company for their entire life. In exchange for working for their commitment to that company the company would reward the worker with among other things a pension. Today most workers have something called a 401K or a 403B to save for retirement. How much you invest and just as importantly how you invest this money will determine your financial security. In a 401K the employee invests part of their pay check into this plan. Many times the employer will match the amount the employee contributes to this portion of the plan.
I suspect if you look back to your schooling a very well meaning teacher had a stock picking contest in one of your classes. You had to pick a stock at a closing price for a particular day and six to eight weeks later at the end of the contest you would see who won by who had made the most money based on the performance of the stock. I understand why teachers us this technique. It keeps students interested in the stock market and it is of short duration which fits nicely into a class schedule. These teachings are not wise investing. No investment advisor in his right mind is going to tell you to put all of your money in the stock of one company.
When we invest we have better choices today than we had even five years ago. Today we have something called exchange traded funds, target retirement funds, no load mutual funds loaded mutual funds, closed end mutual funds as well as a host of other investment vehicles. So we need to relearn how to invest. By investing in funds we spread our risk over several companies. Roughly eighty percent of all fund managers do worse than the major stock indexes by picking stock. For the most part these trained professionals have tools to evaluate companies that most of us can only imagine. If the professionals have a hard time picking stocks how are you going to do it?
Make the most of your investments
So how do we invest?
The first step is always an asset allocation. An asset allocation is where you pick out how much of your money you are going to invest in which asset classes. At a young age you may be best served by having all of your money in aggressive stock funds. My belief is that you will do just as well by having at least a small portion of your money in fixed income you will experience the same gains with less market fluctuation.
The next step is to choose the best investment vehicle for you. I like no load managed mutual funds managed by the best managers. It takes a little work but if you want the best returns you need to do this! That may not be the choice for you. Perhaps you will choose to go the target retirement fund route, low cost index funds or even and Exchange Traded Fund. If you go to a commission based advisor they will probably do a nice job for you but they will charge you about a five percent fee. Why pay for something when you can get something as good or better for free? Keep in mind the commission based advisor wants to maximize their profit not so much your returns.
Online brokers are ok but they charge you something every time you buy of sell. Some even charge you for not buying or selling (inactivity fees). Worse yet some charge you to withdraw your money!
Many no load fund companies will charge you nothing to invest with them.
Select the best mutual funds. Just as an example assumes that 20 years ago you invested ten thousand dollars in the Gabelli Mathers Fund it would be worth just over thirteen thousand today. If you invested in the Gabelli Asset Fund it would be worth almost seventy thousand. Clearly selecting good mutual funds will do more for your investments than bad ones.
Do not fall into the trap of investing in single stocks, penny stocks or highly leveraged investments.
Do not cash out your 401K plan roll it over to an IRA or even a new employers plan. You will pay a hefty penalty and taxes on the money and you will have nothing saved for your retirement. You may be lucky enough to have a small company sponsored pension plan. You probably will get a small social security check but most of your money will come from your savings. Invest it wisely.