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Home Investing for young people
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Written by Administrator   
Friday, 27 March 2009 02:26

Investing for young people

Investing for young people really is no different in principal than if you are middle aged person or even a senior citizen and you are just getting started. As a young person you still have all of the same choices in investments as these other groups have. And just like them you need to decide if you want to invest in stocks, mutual funds, bonds, or just stick with the safety of a savings account. You may even be interested in real estate or other investments, and that's something to consider as well. There is one advantage that younger people do have however - and that is the advantage of time.


Timing

Time is a very critical component when it comes to being a successful investor. All markets move in cycles, and they all experience both up cycles and down cycles. For example, in the stock market if you enter the market at the beginning of a down cycle (also known as a "bear" market), you can probably expect to make no money at all for the duration of the cycle, and you may even lose some money. And how much really depends on the severity of the down cycle and how long it lasts. In some nasty bear markets, it's not uncommon for indexes to fall by 20%, 25% or even more, from high to low over the course of a year. But past history shows us that eventually these bear markets will come to an end. Some last just a few months, while others can last years. At the end of these bear market cycles, often they are followed by the beginning of an up cycle (also known as a "bull" market). Once an up cycle starts, the losses from the previous bear market can sometimes be recovered in a couple of years or even less.

So as you can probably see, sometimes you need to be in the market awhile before you start to see a substantial profit. And if you are a young person, you'll have time to recover any losses you may happen to incur. Older people, especially senior citizens, don't have this luxury. Aside from their age, seniors typically live on limited retirement funds and fixed incomes, and they cannot afford losses. If you are young, it's assumed that your income will increase over time and you'll accumulate assets, which means if you lose money when you are younger, there's a pretty good chance you'll recover these losses over time. How much time will it take? That really depends on the timing of the market itself, as far as when you enter the market. Unfortunately nobody can predict when these cycles will start or end, so trying to "time it" is almost an exercise in futility, unless you are psychic. Although if you are psychic - please call me with your stock tips :-).

Taking big risks can mean reaping big rewards

Now that you see how time helps you as a young person, the next thing you'll need to be aware of is risk. Generally, the more risk you are willing to take, the greater the potential returns tend to be. And the opposite is true as well, the less risk you are willing to take, the lower the potential returns are. For example, in the right market and in the right stock, it's not out of the question for someone to buy a stock, and within 12 months they've made a return of 30%, 40% or even more. However, in a bad market or in a bad stock, you could just as easily lose 30%, 40% or more. So as you can see, with stocks there's the risk of substantial losses, but the possibility of hefty profits. On the other hand, you may not want to take the chance of losing that much money, no matter how much you might possibly make. In that case you might prefer to put your money in a CD (certificate of deposit), where you may only earn a 3% return over the course of a year, but you'll have the security of knowing you won't lose any of your money. Then again, you might be willing to take a little risk and buy a bond. You might make 4% or more in the right bond, and although there is a risk of losses with bonds, as long as you stick with government bonds the risk is usually limited. For the most part, bonds are considered the safest investments outside of putting your money in a savings account.

What makes sense for you?

Deciding whether you want to buy stocks, bonds, or any other type of investment really depends on your overall tolerance for risk, and your time horizon. If all the money you have is $500 that you keep for emergencies like food or paying the rent, then you need to think long and hard if you can afford the possibility of investing in individual stocks. On the other hand if you're in your early 20's, single with no dependants, and you have an extra $500 to invest, you may have a higher tolerance for risk and may consider individual stocks or mutual funds. What it all comes down to is being realistic, and asking yourself how much risk you are willing to take versus the potential profit you would like to make.

More basics

If you want further investing information, there's more on the basics here:

Investing basics

Return to Getting Started from Investing For Young People

Last Updated on Saturday, 28 March 2009 01:57