Best Investment Accounts For Young Investors

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Talk About Stocks & Bonds

Best Investments For Young Investors

When they are ready, introduce your children to different types of investments, including stocks, bonds, or real estate. Broadly share how each of these investments works and, again, apply it to something they are interested in. For example, a great way to begin explaining stock investing for kids is to talk about a company they are familiar with, such as Netflix or even Legos. Explain how stocks make up ownership shares in the company and how they can be bought and sold by investors.

Dont be afraid to brush up on your own financial knowledge before you begin talking to your children. Understanding how investments work is one thing, but knowing the best way to explain it to your kids is a completely different ballgame. Check out educational resources online and think through the best methods for teaching your children before you approach the conversation.

How To Start Investing: A Beginners Guide

10 Minute Read | December 14, 2021

There are people all over the country who want to start investing, but just have no idea where to begin. We get it. Theres a lot of information out there to process and try to understand. Plus, starting anything for the first time can be intimidatingespecially when its something that can have long-term effects on your finances.

Hear us loud and clear: Anyone can investincluding you. And its okay if you have a ton of questions.

What To Look For In An Investment Account

Compared to seniors or baby boomers, young adults arent looking for the same things in an investment account. Older investors might prefer human connection and trades placed over the phone and young adults prefer chat and email support and an immersive mobile experience.

Oh, and low fees. The secrets out on costs and young people wont pay outrageous commissions.If youre in your 20s and looking to open your first brokerage account, youll want to consider the following: getting a lot of bang for your buck is a must. Look for a broker that can provide a great mobile experience with low trading costs and no minimum account balance.

Pore over a list of commission-free ETFs for some great ideas. You might also want some sort of live news feed and access to research materials, including interactive stock charts.

Read Also: Investing And Trading For Dummies

How Much Should I Invest

If youre investing for a pension, a good rule of thumb is to halve your age and pay this much as a percentage of your salary each month.

For example, if youre starting a pension at 40, you should be looking to put 20% of your salary away each month.

If youre investing for shorter-term goals, then think about how much youre aiming to save, and work back from there. You can add in some assumptions about investment growth, such as 3% or 5% a year, but dont forget to deduct fees. If you end up saving more than you need its a nice problem to have.

Before you start an investment portfolio, make sure you have a decent amount of cash in an easy access account say, three months worth of salary that can be used for any emergencies such as your car or boiler breaking down.

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Start A Retirement Fund

Best Investment Accounts for Young Investors

Back in the 1950s, it was a common practice for employers to take care of their employees after they retired with a generous pension plan crafted by the company in exchange for years of service.

As people began living longer and wages failed to keep up with inflation, it slowly became the responsibility of employees to handle their own retirement funds through contributions to a 401 or Individual Retirement Account .

Baby Boomers face a serious problem many do not have enough money to make it through retirement and are forced to work past the retirement age of 66. Young adults who begin saving now can avoid this problem by growing their money over time.

Also Check: Savings Ira Vs Investment Ira

Choose Between Active Vs Passive Investing

Next question: how hands-on do you want to be with investing?

With a passive investing approach, youre buying the entire stock market, which will deliver average market returns minus a small fee charged by the index funds or ETFs. Its the set it and forget it approach: youre stashing your cash into an investment portfolio and leaving it there for the long term.

An active investing approach means hiring a fund manager to actively manage your portfolio and try to beat a benchmark, but it means paying more in fees. Alternatively, you can act as your own fund manager and pick your own individual stocks or ETFs using an online brokerage.

Passive investing
Simple, hands-off, evidence-based, and reliable way to earn market returns minus a small feeComplex, expensive, hands-on, emotion-driven, strong possibility of underperforming a broad market index
Tracks broad market indexes by owning the underlying stocks in the indexBuild your own portfolio of stocks and/or ETFs, or invest with an active fund manager
Rules-based approach to allocation and rebalancingGoal is to outperform a benchmark index
Little to no effort or research requiredHigher fees typically lead to underperformance

But which approach performs better?

It may seem boring, but getting rich the slow way does work. 80-95% of active investment strategies fail to outperform their benchmark over the long term. Plus, active funds cost more than passive funds, which eats into your returns.

Determine Your Asset Allocation

Once youve figured out how much loss you can stomach and afford, it will shape the make-up of your investment portfolio. Specifically, how much of it to allocate towards stocks and how much to allocate towards bonds. Here are some examples:

  • Low risk: Typically contains 40% stocks and 60% bonds or other fixed-income securities.
  • Medium risk: Typically contains 60% stocks and 40% bonds.
  • High risk: Typically contains as much as 100% stocks.

When constructing and rebalancing your portfolio, always remember that diversification is key. Never let your portfolio rely too heavily on a particular industry or bond type. A well-diversified portfolio is more sustainable and hedges you against unforeseen changes in the economy.

If you have no clue or your eyes are glazing over, dont worry. Theres an easy solution. Just hand over the task to a robo advisor.

A robo advisor is a digital investment platform that can build a balanced investment portfolio to match your risk tolerance and goals. With a robo advisor like Wealthsimple, all you have to do is answer an online questionnaire, and it will put together a risk-appropriate, diversified investment portfolio. It also does the work of managing your portfolio.

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Investing For Kids: How To Teach The Basics

The best approach for teaching financial concepts to your children is to take it slow and build a strong foundation. Start with the basics, such as spending or saving and go from there. When they are ready you can begin explaining more complex topics, like stocks and investing. Read through these steps as you approach the investing basics with your kids:

  • Show Them How To Save

  • Teach Them Investing Basics

  • Keep Their Attention

  • Determine Your Risk Tolerance

    Top 10 Investment Accounts For College Students 2021: Top Brokers for Young Investors FUNDS S2E36

    Heres the million-dollar question: how much risk are you willing to take?

    Every type of investment comes with a certain level of risk, which is often linked to the potential return. Generally speaking, the more risk youre willing to take, the greater the return. A few examples:

    • GICs are considered the safest investments in Canada, but the best GIC rates usually range between 1 to 3%, depending on the term.
    • Bonds are considered a low-risk option that helps balance out your portfolio from tumultuous times.
    • Stocks are more volatile, going through bear and bull markets where the market rides a rollercoaster of ups and downs. We saw this most recently during the stock market crash during the COVID crisis. As a result, on average, the stock market returns around 9-10% per year.
    • Cryptocurrency is one of the most volatile investments you can make. Case in point: the value of Bitcoin increased by more than 90% during the COVID-19 crisis. But in May 2021, the Bitcoin price plummeted 40% simply because China decided to crack down on crypto.

    Investing is a balancing act: the goal is to build a risk-appropriate portfolio meaning a set of investments that match your risk tolerance. But how do you determine your risk tolerance?

    Do some self-reflecting. Do market ups and downs make you feel pukey and panicked? Do you sleep better at night with a bond buffer in your portfolio? Or are you game to go all-in and build a portfolio of 100% stocks? Be realistic!

    Also Check: Fidelity Investments Socially Responsible Funds

    Invest In Index Funds

    The stock market is one of the best places to invest your money, but you may not understand how to value stocks, what stocks are worth purchasing and how to effectively diversify a portfolio to avoid losing money.

    Index funds are prepackaged bundles of stocks that track a particular segment of the market. Many index funds track the S& P 500, which is an index thats widely considered to represent the health of the economy of the United States as a whole.

    Index funds offer novice investors an easy way to build a portfolio quickly with expert assistance. They frequently require lower fees when compared to other types of mutual funds because they are not actively managed by a team of investors and financial advisors.

    Want to start investing in index funds? Check out some of Benzingas favorite brokerages and open an account.

    • Does not support trading in mutual funds, bonds or OTC stocks

    M1 Finance: Best For Automated Account Management

    • Automated account management, but you choose where to invest

    Why This Company Made Our List: If you like the idea of automated account management but like to choose where to invest, M1 Finance could be the ideal brokerage firm for you. In addition to streamlining the investment process and ensuring your funds are allocated where theyll benefit you the most, M1 Finance is free. It doesnt get more affordable than that.

    M1 Finance comes preloaded with 60 targeted investment portfolios known as pies, with expertly chosen slices.

    If those pies dont suit your palette, you can also create your own, choosing from M1s robust offering of ETFs and stocks. M1 Finance also uses an algorithm to reduce your capital gains tax any time securities are sold.

    If you arent sold yet, you can take a look at our M1 Finance Review. In the meantime, consider this rundown of some of M1s best features:

    • Tax exporting: Your M1 investment records can be exported straight to H& R Block and TurboTax
    • Retirement: M1 Finance allows you to open traditional, SEP, and Roth IRAs, as well as rollover plans.
    • SIPC Protection: Your money is protected for up to $250,000 in cash and $500,000 in cash and securities.
    • No fees: No trading fees, no advisory fees, and no account management fees, period.

    What Holds it Back: M1 Finance doesnt come with tax loss harvesting, and they dont offer any interaction with financial advisors or investment professionals.

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    Best Online Stock Brokers For Beginners

    BrokerNerdWallet Rating

    NerdWallet’s ratings are determined by our editorial team. The scoring formulas take into account multiple data points for each financial product and service.

    Fees

    Fees

    when you invest in a new Merrill Edge® Self-Directed account.

    View details

    when you invest in a new Merrill Edge® Self-Directed account.

    Why we like it

    Merrill Edge offers high-quality customer service, robust research and low fees. Customers of parent company Bank of America will love the seamless, thoughtful integration, with a single login to access both accounts.

    Pros

    • Integrated with Bank of America.

    Cons

    Fees

    in free stock for users who sign up via mobile app

    View details

    in free stock for users who sign up via mobile app

    Why we like it

    SoFi Active Investing’s $0 trading commission and $0 account minimum are attractive to new investors, but a lack of investment choices such as mutual funds and bonds is a drawback for those saving for retirement.

    Pros

    • Commission-free stock and ETF trades.

    • Cryptocurrency trading.

    Fees

    when you open and fund an E*TRADE account with code: BONUS21

    View details

    when you open and fund an E*TRADE account with code: BONUS21

    Why we like it

    E*TRADE has long been one of the most popular online brokers. The company’s $0 commissions and strong trading platforms appeal to active traders, while beginner investors benefit from a large library of educational resources.

    Pros

    • Commission-free stock, options and ETF trades.

    Cons

    Fees

    View details

    Why we like it

    Pros

    Should I Pay Off Debt Before Investing

    Best Investment Accounts for Young Investors

    As touched upon above, young adults struggle to decide where their financial priorities should lie in terms of paying off debt quickly and starting to invest as soon as possible.

    Many are faced with the dilemma of deciding whether to invest or pay off student loans, and the answer can be complicated.

    When making this decision, consider the type of loan, the interest rate, your risk tolerance, and your overall expected return from an investment.

    debt routinely carries double digit interest rates, usually between 15% 20%. Furthermore, this debt is guaranteed, whereas most investments are not.

    Its almost always smarter for young adults to pay off credit card debt first than investing. This is because you are more likely to receive a lower rate of return on the investment than you would avoid by paying off the high interest from a .

    Whether you should invest before or after paying off student loans is trickier. Thats become a key decision young adults must make when learning how to invest in your 20s or 30s.

    The average interest rate for student loans is between 5% and 7%, which is much lower than credit card interest.

    Paired with the fact that you can use interest payments on student loans as a tax write off , this means that for many people, its a good move to be investing and paying off student loans simultaneously.

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    Teach Them Investing Basics

    As your children learn more about money and spending, try approaching the investing basics. A few introductory concepts include risk vs. reward and what it means to earn or lose money. Each of these ideas can be approached one by one and built upon as your children gain a stronger understanding of what they mean. Try relating these topics to things your children are interested in, such as sports, toys, or even movies. The key is to break down concepts in a way that engages them over time.

    Where To Open An Account

    Your 401 plan will not offer you a choice of where to open an account and will come with a set investment menu through your employer. As for other types of accounts, you have a lot of choices.

    Taxable accounts and IRAs can be opened at many popular investment custodians, such as Charles Schwab, Fidelity, Vanguard, TD Ameritrade and a host of others. Additionally, many mutual fund companies offer account options as well. Robo advisors such as Betterment can also be an option. These advisors invest your money in low-cost investment options, such as exchange-traded funds , based on a computer algorithm tied to your specific needs. This can be a great option for someone just starting out.

    In todays online world there are many new types of accounts and account providers. There is even an app called Acorns that rounds up the amount from purchases from linked accounts and invests your spare change. Technology can enable many wonderful twists on basic savings and brokerage accounts, for example by using personal finance apps to manage your accounts. As with any type of financial account or transaction, be sure you understand how the account and its technology works, who is behind it, and if it is right for you.

    CDs and other vehicles for saving are available at banks and many brokerage firms. In fact, the lines separating traditional financial service providers are blurring as more firms attempt to offer a full range of accounts and services.

    Also Check: Jp Morgan Investment Banking Recent Deals

    Home Buying And Real Estate Investment Trusts

    Real estate investment trusts, or REITs, allow you to invest in large-scale real estate without actually buying property.

    Many REITs are registered with the U.S. Securities and Exchange Commission and are traded on the stock market. Non-publicly traded REITs carry more risk.

    REITs let you add diversified real estate to your investment portfolio and may offer higher dividend yields than other investment options.

    Buying a home is another way to invest in real estate.

    Purchasing a home allows you to build large amounts of equity you can borrow against. Plus, most property values increase over time.

    An initial $6,000 down payment on a $250,000 home can result in owning an asset worth $300,000 or more in 30 years.

    However, purchasing a home in your 20s has its drawbacks. First, its expensive and high mortgage payments may limit your ability to invest elsewhere.

    Its also a major responsibility with ample upkeep and maintenance costs over time.

    Finally, the permanence of homeownership makes it difficult to move quickly for a new job or marriage. Its important to analyze the potential cost benefits before purchasing a home.

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