Editor’s note: This article was first published in January 2021. The author’s remark that the website kept earning him a small salary each month refers to that time.
When someone asks me what to invest their money in while they’re young, my usual answer is “nothing, until you have experience in what you’re doing.” Of course, that advice may be too extreme, because investing while you’re young is what will let you build wealth much faster than other people your age.
If you’re young, have no investing experience and not much money, I promise you one thing. If you apply everything I’m going to tell you in this article, and apply it to the letter, in 10 years your finances and purchasing power will be well ahead of 90% of people your age. In 20 years you could already have considerable personal wealth.
And if you’re not young, you can apply what we’re going to discuss here too.
Let’s change the tune, building on the same idea as our previous article, where we covered the most basic points you need to understand about financial education: financial education, like finance and investing, isn’t that complex if we focus on the most basic concepts.
What to invest in when you’re young
There’s a mistake that young people, and not-so-young people, make when they want to learn to invest in the stock market. It may sound contradictory, but the mistake is usually signing up for a stock market investing course.
A course will give you all the theoretical and technical knowledge about investing. Whether you can digest it properly is another matter. And this doesn’t happen only with the stock market; it can happen with any subject.
For example, it’s good to know what a company’s P/E ratio, ROE or EPS are. They’re figures that help when analysing a stock, but do you really need to learn how to calculate them? These days that data is already calculated for you on practically any investing platform.
Don’t get me wrong: the more you know, the better. But if you load yourself up with unnecessary knowledge at the start, learning about investing could quickly become very boring, and you’d end up falling into trading or speculation, which are sold to you as more fun, promising more excitement and higher returns.
My advice is not to take an investing course until you already have lots of questions you want specific answers to. And a specific question isn’t “How can I invest in the stock market?” or “What do I have to do to make money investing in shares?”
Those aren’t specific questions. The questions should be more along the lines of: “How do I know whether a stock is cheap compared with its competitor?” or “Which indicator is the most reliable for timing my entry into a stock?” And so on.
When you have lots of questions like these, then you can attend a course, and in that course the knowledge will slot into place like the missing pieces of a puzzle. You’ll learn much faster.
So, a preliminary piece of advice: learn for free before spending money on knowledge. Luckily, these days most of that knowledge is available free on the internet.
Your first investment when you’re young?
What are you going to invest your first money in if you have no experience or you’re young?
Your first investment will be a book to start learning about investing in the stock market.
Your first investment should always be in knowledge because, as Warren Buffett says, investing in yourself and your own knowledge will give you the best returns. Which book?
Here are the best stock market investing books of all time.
A book can whet your appetite and raise lots of questions, and that’s tremendously good.
Then there’s something you should understand as soon as possible, and it will save you from many of the mistakes plenty of young people are making. The stock market isn’t there to make you rich or to let you live off it, as the snake-oil sellers flooding the internet tell you. The stock market is really there to increase your wealth or multiply your savings.
1. First tip for investing when you’re young: forget speculation and trading
Professionals focus on scoring goals and seizing big opportunities by taking on huge risks, and therefore bigger rewards.
Beginners should focus only on avoiding mistakes. It’s about protecting your money, not gambling it.
The tips we’re about to give are for building a long-term investment strategy. You’re unlikely to get rich in the short or medium term. What we’re going to do is build an asset that, over time, generates passive income for us.
(Read: 11 simple tips for investing in the stock market)
I know those ads saying “make €300 a day trading shares” are very eye-catching, but as we’ve said so many times, if you do intraday trading you will definitely lose money. The trading “coaches” themselves say you learn by losing, and that as a rule people lose around €10,000 before becoming experts.
Once you have experience, you can speculate with trend trading and choose riskier investment strategies.
2. How to invest with little money when you don’t have experience yet
Although I always recommend starting in the stock market with blocks of at least €1,000 or $1,000, if you’re not yet earning much money to start investing, you can begin by investing in low-cost index funds.
With these funds you can invest 50 or 100 euros a month (whatever you can), and that way you start playing the game of compound interest, while also building the habit of saving and investing.
By the way, in case you don’t know what index funds are: they’re funds that replicate the performance of an entire index. In other words, it’s as if you had bought every share in that index.
Let me remind you of the 4 basic pillars of personal finance:
- The money you earn
- The money you save after earning it
- The interest you get on that money
- And time…
Without a doubt, the most important is the first pillar: the money you earn. If you put a lot into this pillar, you need much less of the others. And this isn’t rocket science, it’s common sense.
If you manage to earn a lot of money, you can save more, and you need less interest on your money to reach your financial goal sooner (in less time).
3. When you’re young, don’t invest in stocks that don’t pay you dividends
If you want to invest in individual stocks rather than an index fund, my advice is to invest only in stocks that pay good dividends.
That way you invest in solid, established companies that are supposedly lower risk, and every quarter you also receive dividend payments you can reinvest, which gives the magic of compound interest even more power. Every year you’ll have more shares, and so every year you’ll receive more dividends.
I know some people will tell you dividends are a scam, that they don’t recommend investing in companies that pay dividends, and so on. What’s a scam is that advice.
That doesn’t mean that if a promising company comes along at some point you can’t put a percentage of your investment capital into its shares, but… always sensibly.
At certain moments in the market, as in the summer of 2012, we could “hit” everything, from penny stocks to solid companies. Everything was so cheap that it was all going to rise. But clearly, with many penny stocks and riskier names, some people saw returns of over 500%, while solid stocks rose more gradually.
Young, inexperienced investors should look for solid stocks that pay dividends. That way, whether the share price goes up or down, at least we still have the dividend payment (as long as the company keeps paying it). It is, without any doubt, the best way to invest when you’re young.
4. Reinvest your dividends
Companies pay dividends in cash or in shares. Since we’re trying to build an asset, whenever we have the option we’ll take the dividend in new shares. That way, clearly, the next dividend payment will be made on more shares.
(See: 5 steps to building a dividend investing strategy)
5. Average your purchases
Once we have solid stocks in our portfolio, we follow Warren Buffett’s advice: if the shares fall, we buy more. In fact, we can use the well-known DCA investment strategy (dollar-cost averaging), which basically means averaging down. Remember, we’re talking about the long term.
In short, if every month or every three months you keep investing in that index fund or in a selection of stocks regardless of the price they’re trading at, the purchases that land at the lowest points of the price chart turn into large gains over time…
In other words, if you buy a share at €10, then at €15, then at €10 again and later at €5, it’s as if you had bought at an average of €10. So if that share goes back to €15, you’d already have a 50% gain on all your shares combined.
Imagine the returns you could get in 10 or 20 years, especially if you add the dividend payments.
6. Save a sizeable part of your income
When you’re young, the main problem is not having enough money to invest. And that’s what leads many young people to lose the little money they have on risky strategies, trying to make much more, quickly.
Be patient, and remember that investing, as a famous investor once said, shouldn’t be exciting and fun; it’s more like watching grass grow.
So save, and every month, or every few months, keep putting those savings into the stocks you’ve chosen or into your index fund.
7. Earn more money
As I said at the beginning, most people have heard about getting rich on the stock market, but that’s not exactly how it works. Obviously, to get rich on the stock market you need money, and the more money you have, the sooner you’ll get rich. So it’s all about earning a lot of money so you can grow it in the markets. In other words, before you become a smart investor, you’ll need to be an excellent money “maker” in whatever you do: business, your profession, and so on.
See also: Tony Robbins: the simple secret to wealth
Of course, that would take us to another topic: the idea of creating assets that pay you passive income.
What assets to invest in when you’re young
What assets can you start creating now, while you’re young and have more time and energy?
Bearing in mind that building an asset that generates recurring income can take time, I specifically recommend these, because you don’t need money to create them. That way, whether you succeed or fail, you’ll only have lost time, but you’ll also have learned.
Your own website or blog
Believe me when I say that if you do things well and land on an interesting topic, within a few months you could be earning a few hundred euros, and if you do better than well, you can make a living from it.
To give you an idea, even though I barely touched this website for a couple of years, it kept bringing in what amounted to a small salary every month.
Affiliate links
More of the same. Once you have a website up and running, affiliate links will keep earning you something extra every month, especially if you’ve built a site that attracts a fair amount of traffic. On the internet, money is everywhere, and the only way to get a slice of the pie is through traffic. If the traffic is organic, it will also be more profitable and longer lasting.
A YouTube channel
Why not? Start experimenting. Some say it isn’t easy, others say it is… What I can tell you is that if you’re consistent and you’re good at something, you can give it a try. It pays better than taking selfies in the bathroom. I will say it takes effort. If you’re willing to put in the effort and you’re creative and original, you improve your chances of success.
An e-book
I’ve seen real rubbish published as e-books on Amazon, and they sold. If you’re good at a subject, don’t be afraid to give it a go. Or if you have a story to tell, tell it in an e-book.
Same point again: you’re young, you have time, and trying won’t cost you money.
But the best asset, without any doubt, is starting your own business. Look for a business that doesn’t require too much investment, such as any idea you have that can be started online without much money.
I’m not going to tell you to create an info-product right now, because I think the snake-oil sellers have saturated that market, but still…
Here’s an article with several ideas for making extra money from home without having to invest.
And that’s it. If you follow these tips to the letter, with or without experience, you can start investing while you keep learning about investing.
Further reading
- The most profitable investment according to Warren Buffett is an asset everyone should invest in
- Warren Buffett’s 16 best tips on investing
Featured image: Great Western Railway, Public domain, via Wikimedia Commons.
