5 investing need-to-knows for young investors

Karl 16th Feb 2024 One Comment

Reading Time: 5 minutes

Investing can be a daunting prospect, particularly if you’re young and considering whether it’s time to put some of your hard-earned money into stocks and shares.

In this article we’re going to take a look at all the things young investors need-to-know about the stock market.

Click on a link to head straight to a specific section, or scroll down for all of the details…

5 need-to-knows for young investors
How much do young investors need to start investing?

5 need-to-knows for young investors

Investing can be a powerful tool for building wealth. This is true for any age group of course, but it can be argued investing provides a much bigger opportunity for young investors with patience.

Given the decision to invest is a personal one, we can’t say whether you should put some capital into the choppy waters of the stock market. What we can tell you, however, is some important need-to-knows that every young person thinking of investing should bear in mind.

From understanding your tolerance for risk to diversification, try to digest as many as you can!..

1. Investing carries risk

Investing in the stock market carries risk so there’s always a chance you’ll lose some, or all of your money. This is why any young investor should take the time to carefully consider whether investing is right for them.

Before making any investment decisions, it’s crucial to understand your risk tolerance. This is essentially your ability and willingness to endure the ups and downs of the stock market.

Every investor’s personal tolerance for risk will be different but, as a rule of thumb, if you’re a young investor with long-term mindset and happy to accept that your portfolio will likely fall at some point in the future, then you’ve probably a decent tolerance for risk. This means you may be comfortable chasing higher returns, perhaps by putting most of your faith in equities over more conservative assets.

In contrast, if the thought of your portfolio losing 25%+ of its value will keep you awake at night, then it’s likely you’d be better off taking a more-risk averse approach to investing, perhaps by allocating more of your portfolio towards bonds or hard commodities.

Obviously young investors with zero tolerance for risk should probably stick to savings accounts, and there’s no shame in this (as long as you recognise the impact inflation can have on cash).

In short, every young investor should carefully assesses his or her comfort level and tailor their investment strategy accordingly. If you’re looking to get started do take a look at our article that explains how to create your investing strategy.

2. Compound interest can be very powerful

If you’re a young investor, the earlier you start investing, the more you can benefit from the power of compound interest.

Compound interest is quite magical in a way. It refers not to the returns earned on your initial investment, but to the returns earned on those returns.

Returns from other returns can lead to exponential growth over time and highlights why starting early – even with a modest initial contribution – can allow young investors to build up a substantial pot of wealth, particularly when investing over many decades.

3. Diversification is key

Diversifying your investment portfolio is a key strategy for managing risk. Young investors in particular should avoid putting all of their capital into a single investment or asset class for this very reason.

When spreading investments across different types of assets, such as stocks, bonds, property, or other alternative assets, it’s possible to reduce the impact of a poor performing investment on your overall portfolio. For example, let’s say you put 100% of your capital into equities and six months down the line the stock market suffers a colossal crash. In such a scenario it’s likely your portfolio would end up seriously in the red.

In contrast, if you’d instead allocated just 50% of your portfolio towards equities, and the rest of your portfolio towards other assets – say, 20% into bonds, 20% in gold, and 10% in alternative assets – it’s probable your non-equity investments would help cushion the impact following a crash in equites.

For more on the benefits of mixing up your investments, see our article that highlights the importance of holding a diversified portfolio.

4. It’s possible to invest in a tax-efficient manner

Before rushing to open a general investing account, it’s important for young investors to recognise the advantages of putting a tax-free wrapper around their investments in the form of a Stocks and Shares ISA.

Investors don’t have to pay any income tax or capital gains tax on any returns earned from investments that sit within a Stocks & Shares ISA. This is why Stocks & Shares ISAs are often the first port of call for investors looking to invest in a tax-efficient manner.

Importantly, the amount you can put into any type of ISA is capped by the annual ISA allowance. For the current 2023/24 tax year, the allowance stands at a fairly generous £20,000.

Put simply, if you’re investing for the first time, then there’s likely no reason why you wouldn’t want to put a tax-free wrapper around your portfolio. To learn more, see all you need to know about ISAs.

5. Staying informed can boost your chances of success

The investing landscape is dynamic, with markets, regulations, and economic conditions constantly evolving. This is why young investors should aim to keep on top of external affairs in order to boost their chances of becoming a successful investor. In simple terms, the more you know, the better equipped you’ll be to make informed investment decisions.

P.S. if you’re looking to broaden your investing knowledge then the Money Magpie Investing Section is obviously a good place to start, as is signing up to our bi-weekly Investing Newsletter!

How much do young investors need to start investing?

You don’t need lots of capital in order to start you investing journey. In fact, there are now a number of investment brokers that allow you to start investing with as little as £1!

The point is, when it comes to investing, there’s no magic sum as to what you should start with. That’s because the amount you can put aside to kick-start a new portfolio will likely depend on the health of your finances as well as your financial goals. In short though, as long as you’re happy to take on some investing risk and you don’t have any (non-mortgage) debt, then you’re probably in a good place to buy some initial stocks and shares.

Remember, investing is best done with a long-term horizon, so starting early and making regular contributions (if you can) is arguably more important than the amount you start with. In other words, investing is a marathon, not a sprint!

For more on this topic take a look at our article that explores how much should you invest when you start investing.

Disclaimer

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.