Five tips for teenage traders to invest their first $500

Starting early, diversification and having a long-term view can set young people up for a healthy financial future, experts say

With time on their hands during pandemic-induced movement restrictions, many teenagers used their pocket money to trade in shares. Photo: Unsplash

A new wave of young retail investors emerged during the Covid-19 pandemic thanks to low-fee mobile trading apps, such as Robinhood and eToro, and social media platforms.

With time on their hands during movement restrictions and extra money to invest after a series of government stimulus packages, many teenagers around the world jumped on the trend and used their pocket money to trade in shares.

They embraced the “gamification” of trading, which was driven by US meme stocks including AMC Entertainment and GameStop.

“Teen investors can start small, dip their toes and learn from very small mistakes on how to properly build their wealth,” says Mark Chahwan, co-founder and chief executive of robo-advisory platform Sarwa.

“It is important to note that investing is a patience game and is about the long-term view. Starting early gives you the confidence and the knowledge you need for later. If you teach teenagers to invest properly, diversify and have a long-term view, you can set them up for a healthy financial future.”

Thirty-nine per cent of teenagers see the stock market as an opportunity to “make money quickly”, while 20 per cent believe it’s “too risky”, according to a July 2021 survey by non-profit youth organisation Junior Achievement USA and tax, accounting and consulting company RSM, which polled 1,000 American teenagers.

Forty per cent of teenagers polled think stocks are a “good long-term investment” but if given money, 37 per cent said they wouldn’t invest in the stock market.

We spoke to financial experts about the different strategies teenagers can use to invest their first $500.

It is important to note that investing is a patience game and is about the long-term view

Mark Chahwan,
co-founder and chief executive of Sarwa

Start as soon as you can

Learning how to invest and the best practices at a young age has numerous advantages, experts say.

“If you start early and know how to invest and diversify your investments properly to optimise returns, the impact can be massive. Your money has so much time to be put to work: this is a powerful gift,” Mr Chahwan says.

Compounding makes an amount grow at a faster rate because, in addition to earning returns on the money you invest, you also earn returns on those returns over time.

Teenagers can invest in their financial literacy skills through free or low-cost educational resources, which make it possible to learn the basics of investing from a young age, says Chaddy Kirbaj, vice director at Swissquote Bank Dubai.

Both Generation Z (those born between 1997 and 2010) and Generation Alpha (those born after 2010) are “fortunate to have the most sophisticated devices and technologies at their fingertips”, allowing them easy access to knowledge and educational tools, Mr Kirbaj says.

Diversify

It’s important not to put all your eggs in one basket, so even if you like a company such as Nintendo or Apple, it’s best not to invest all your money in it, says Laith Khalaf, head of investment analysis at AJ Bell.

“This is where a fund can come in, which invests in a diversified pool of shares,” he says.

If you’re investing in your teenage years, then you have a long-term horizon in which to ride out the ups and downs of the stock market, Mr Khalaf adds.

“You shouldn’t take risk for risk’s sake, but the stock market has historically returned significantly more than cash in the long run.”

Teenagers should also choose their investment platform wisely. Make sure to look into the associated costs and try to find one that is transparent, has no hidden costs and charges a minimal fee or no fee at all, Mr Chahwan says.

It’s important not to put all your eggs in one basket, so even if you like a company such as Nintendo or Apple, it’s best not to invest all your money in it

Laith Khalaf,
head of investment analysis at AJ Bell

Consider tracker funds

A tracker fund simply follows the performance of an index, such as the S&P 500 or the MSCI World.

These funds offer you broad market access without having to do huge amounts of research on what to buy, Mr Khalaf says.

Put $450, or the bulk of your money, into a portfolio of globally diversified index funds, says Sarwa’s Mr Chahwan.

“Know that most successful investors have a buy-and-hold attitude and that they diversify their investments across asset classes, industries and geographies,” he says.

“Exchange-traded funds are a great way to achieve that. You can even add a small exposure to an asset like Bitcoin, which is seen by some as a good hedge against inflation, into your diversified portfolio.”

Use the remaining $50 or a small percentage of your money to choose specific assets you believe in and know well, Mr Chahwan says.

For instance, some teenagers like Disney and want to be part of that story, so they buy Disney stock, he adds.

Teenagers can also opt for passive investments with a focus on mutual funds, investing their income in the form of monthly instalments to low-cost/low-risk funds, Mr Kirbaj says.

Control your emotions

If you have a sound plan, stick to it, says Mr Chahwan.

“The market moves up and down. It’s part of its nature. Remind yourself that when you zoom out, the global economy trends upwards and as long as you are properly diversified, you are on the right track,” he adds.

Teens can also opt for passive investments with a focus on mutual funds, investing their income in the form of monthly instalments to low-cost/low-risk funds

Chaddy Kirbaj,
vice director at Swissquote Bank Dubai

Sixty-six per cent of investors have made an impulsive or emotionally charged investing decision they later regretted, according to an August 2021 survey of 1,100 investors by comparison website MagnifyMoney. This is more common for Gen Z and millennials than Gen X and baby boomers, the poll found.

About 58 per cent of investors polled agreed that their portfolio performs better when emotions are left out of the equation, while 47 per cent cited difficulties keeping emotions out of investing decisions, according to MagnifyMoney.

Don’t overtrade

It can be tempting to buy and sell investments depending on new trends and what’s going up and down but this is likely a road to financial ruin, Mr Khalaf warns.

“There are costs every time you trade, and short-termism is likely to mean every now and then when you jump ship, you fall into the water below. The best way to get rich is to get rich slow, so be patient and invest for the long term,” he adds.