Start saving now and don't ever stop, young investors

Question: Connie in Colerain Township: My son is 22 and wants to start investing. But I don’t have much experience with it, so I don’t think I can help him much. Can you share some advice?

A: Of course! We’re happy whenever a young adult shows interest in investing and long-term planning. And quite honestly, that’s the first distinction we want to make: Your son needs to understand there’s a difference between long-term investing and stock picking (or day trading). It’s likely he’s heard of certain apps and websites that allow him to buy and sell stocks from minute-to-minute. In this case, short-term profit is all that matters, but in our eyes, this is akin to gambling. At Allworth and on our "Simply Money" radio show, we promote long-term investing. That is, having a goal that’s years away, making an investment plan to reach that goal, then sticking with it. 

Your son should also use time to his advantage. As Albert Einstein once reportedly said, compound interest is the eighth wonder of the world. Essentially, money makes money – and the money money makes, makes more money. This means he should start saving now and not ever stop. Consistency and time will do more for him in the long run than anything else. 

Additionally, he should think about short term and long-term goals. For any goals within two to three years, just a plain-old bank account is fine (that money shouldn’t be exposed to any market risk). For longer-term goals such as retirement, a simple index fund that tracks the S&P 500 (the 500 largest companies in the U.S.) is a good starting point. This allows him to invest in the major contributors to the American economy. And right now, it’s OK if he’s stock-heavy since he has decades to ride out the ups and downs of the market.

If he has a 401(k) through work, he should save at least enough to get the match (if offered). If his employer offers a Roth 401(k), saving in that is an even better idea since he’ll get tax-free growth. If he doesn’t have a retirement plan through work, he should open up a Roth IRA through a brokerage firm like Vanguard, Fidelity or TD Ameritrade. (He can also do this even if he does have an employer plan.) And he should never take money out of retirement accounts early.

The Simply Money Point is that your son should focus on timeinthe market, nottimingthe market. And while there may be temptation to get fancy with his investments, simple is usually best.