With the Christmas season now in the rear view mirror, many students at Cathedral Prep are finding themselves with a little excess Christmas cash. Also, seniors getting ready to graduate in a few months may be anticipating a significant amount of cash in the form of graduation gifts. Despite the temptation of blowing it on meaningless, short-lived material items, many of us at Cathedral Prep would prefer to be smart with our money, and this likely means investing for the future. But how should an inexperienced high school student spend their money to ensure their money will grow and benefit them in the long run?
One thing is for sure: if you want your money to grow in the long term, do not buy gold. You have likely seen the many commercials advertising the value of gold over time. As flashy and tempting as the ads on some news channels may be, the evidence strongly contradicts their claims. A study conducted by famous economist Jeremy Siegel analyzed what one dollar invested in different ways in 1802 would be worth today. A dollar invested in gold over 200 years ago would be worth approximately $4.50 today, adjusted for inflation. While this number does mean that the investor made money over time, it is lackluster compared to other forms of investing. The same dollar put into bonds would be worth an impressive $1,632, while a dollar put into the stock market would be worth over $700,000.
While stocks certainly have more short-term risk, as the stock market may drop at any given time, over time, any loss will be more than made up for. But what stocks should a young adult purchase who is relatively unfamiliar with the market? One of the best ways to invest for the long run is by purchasing Exchange-Traded Funds, or ETFs. ETFs are very similar to regular stocks but whose performance is based on the entire indexes, like the S & P 500, which is an index of 500 large, publicly traded companies. Other popular indexes that may sound familiar include the Dow Jones Industrial Average and the Nasdaq Composite. Instead of investing in an individual company and hoping it booms while praying it never busts, ETFs allow an investor to put their money into a wide range of successful companies all at once, without needing the thousands and thousands of dollars it would take to buy shares in all of them.
One of the benefits to ETFs, in addition to being lower risk for more modest investors, is the ability to invest independent of a financial advisor. Often times these advisors will charge a percentage of the money they are investing for you as their fee. While these fees usually seem small, on average about 2% of the worth of the assets annually, they really add up over time. Let’s say the stock market grows at a constant rate of 7%. Over the course of 50 years, this would mean one dollar invested would grows to over $30. However, if a financial advisor had been taking out 2% annually, your money would now only grow at a rate of 5%. Because of compounding growth, your one dollar would now only grow to about $12 over this time period. While it might make you feel safer putting your money in the hands of a professional, the high premiums they charge are likely not worth it, especially since most do not outperform what the average growth of the market is.
While getting into the world of investing might be scary, it can be quite simple with just a few, small investments. It is also important to make an investment and let the money sit; constantly looking at how your money has grown will only make you want to try your luck picking your own stocks, which is unlikely to give any better of a result. Instead, invest what you can and come back years from now and see how much your measured decision has paid off.