A Teen Guide to Buying Mutual Funds
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For a teenager, that can provide an incredible lifelong compounding benefit.
Later in life, the teenager will be able to make penalty free withdrawals from the account in order to either make a down payment on a first-time home purchase, or for education purposes. They allow for tax-deferred accumulation of investment earnings.
Best Investments for Teenagers
They also permit penalty free withdrawals for the purchase of a first-time home, or for educational purposes. A teenager can be building tax-free income for retirement before even reaching adulthood! But that creates another unique advantage: contributions withdrawn from a Roth IRA can be taken tax-free and penalty free at any time.
This is a massive advantage for a teenager whose building an investment account, and likely to need the funds well before retirement.
More from Investing
The teen will have the option either to withdraw funds early as needed, or to let them grow for retirement. Not all investment brokerages will permit you to open an IRA account for a minor child. Some brokers and mutual fund companies will allow you to set up a custodial IRA. That can be anywhere between 18 and In the meantime, you will have control over the account, including investment decision authority.
You can maintain legal control over the account, while allowing the teen to fully participate in investment decisions. You can open an account, then have the teenager choose the investments — subject to your final approval. As a teenager grows more investment savvy, she could begin choosing and managing the account more actively.
Eventually, she will make the investment decisions, and you — as account custodian — will execute the trades. Not all investment brokerage companies offer custodial IRAs. But some that do offer both traditional and Roth IRAs for teenagers and the minimum initial investment requirement include:.
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Until and unless robo-advisors make custodial IRAs available for minors, the brokerage firms listed above can work well. Funds invested in the account can be used for any purpose. The major benefit of mutual funds is they allow investors to invest in many different companies at once. When mutual funds increase in value, the profit is shared with the investors. That distribution can then be reinvested to buy more shares of the stock. Those shares make more profit, which can be reinvested and on and on. The most important factor in making money from mutual funds is investing consistently for a long period of time.
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How long you keep your money invested is even more important than what funds you choose to invest in! You want to use a buy-and-hold strategy when investing in mutual funds. Choose investments with a long history of above average returns, and stick with them for the long haul. One of the biggest perks of mutual funds is diversification.
Investing Guide for Teens - TheStreet
That can be intimidating, but exposing your investment to some level of risk is necessary if you want your money to grow over the long term. However, historically, most people have seen returns in the long run. Just put it in a savings account. Wealth-building takes hard work and discipline. If you want to invest for your future, you need to plan on investing consistently—no matter what the market is doing. For instance, investing in tax-advantaged accounts through your workplace, like a k , is a great way to get started.
And if you get a company match on your contributions, even better! If you have a traditional k at work with a match, invest at least enough to get the match. Then, you can open a Roth IRA. The only downside to a Roth IRA is that it has lower contribution limits than a k. Have a Roth k with good mutual fund options? Dave recommends four types of mutual funds and spreading your investment equally across each type.
Each fund type can respond differently to the same event. A good start for teens is to invest in things they know and understand, according to Schulte. If it happens to be technology, then great. This exercise will often result in [finding] large companies that we all know by name.
How to Invest in Mutual Funds
The next step would be to find a low-cost mutual fund or exchange traded fund that owns some or all of the stocks. But investing in a handful of stocks or a single sector is risky.
Diversifying risk is one of the most important tenets of a smart investment portfolio — and a concept teens should learn early. Bonds and other asset classes play a big role in a portfolio for investors of any age. Other basic terms helpful for new investors: asset allocation, index fund, dollar cost averaging and dividends, among many others. Bonds: A debt security where the investor lends to government or corporate entities.