Although it can be exciting to bet big on a company you believe in, investing in individual companies is risky and isn’t necessarily the best way to make money investing. It’s extremely difficult and requires a lot of luck to predict future winners in the stock market consistently. 

Even worse, “investing” in hyped-up stocks with the goal of multiplying your money in a few days or weeks is an extremely risky path. Although it may be appealing, it’s nearly impossible to consistently predict such things. You’re essentially just gambling with the possibility of losing almost all of your money if you’re not careful. Unless you get very, very lucky, this isn’t a good approach to the stock market. 

This is why investing in ETFs so appealing; they provide a simple way to get consistent returns. Although it can be more lucrative (and fun) to invest in individual companies, ETFs are a great way to offset risk and generate consistent returns. 

ETFs 

So what exactly is an ETF?

“An exchange-traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities.” – Investopedia. 

There are many benefits of investing in ETFs, like consistent long-term growth, broad market exposure, and easy diversification.

“Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others. The benefits of diversification hold only if the securities in the portfolio are not perfectly correlated—that is, they respond differently, often in opposing ways, to market influences” – Investopedia.

Expense ratios

It does cost money to own ETFs. Depending on a fund’s expense ratio, a percent of its returns that year will be used to pay the costs of managing the fund.

“An expense ratio (E.R.), also sometimes known as the management expense ratio (MER), measures how much of a fund’s assets are used for administrative and other operating expenses” – Investopedia.

For example, if a fund had an expense ratio of 0.10%, for every $10,000 you invested in it, $10 would be used to maintain the fund. 

Types of ETFs

There are many different types of ETFs that usually follow themes. For example, some ETFs are comprised of Fintech companies, while others seek to provide exposure to real estate.

Some ETFs are passively managed, meaning there isn’t a fund manager making decisions, but rather the decisions are automated. The other type of ETFs is those which are actively managed, where a team of researchers and analysts make decisions about where to invest the fund’s money. Depending on the type of ETF you invest in, the expense ratio will be different. Generally speaking, passive ETFs typically have a low expense ratio of less than 0.20%, compared to actively managed ETFs with more expenses which typically have expense ratios between 0.50% and 1%.

ETFs to Invest in as a teenager

Here are two ETFs you can consider if your investing as a teenager:

VUG

VUG is an ETF that focuses on investing in large growth stocks. “The investment seeks to track the performance of the CRSP US Large Cap Growth Index that measures the investment return of large-capitalization growth stocks. The fund employs an indexing investment approach designed to track the performance of the Index, a broadly diversified index predominantly made up of growth stocks of large U.S. companies.” – U.S. News. The fund has an expense ratio of 0.04% and its top holdings include Apple, Microsoft, Amazon, Alphabet, Facebook, and Tesla. 

ARKK

ARKK is an actively managed fund that invests in disruptive companies. “ARK defines “disruptive innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the world works.” – ARK. This fund has an expense ratio of 0.75% and its top ten holdings are Tesla, Teladoc, Roku, Square, Shopify, Zoom, Twilio, Zillow, Spotify, and Coinbase. 

Although ETFs help you diversify, investing in them still carries risk, just like any other investment in the stock market.

Index funds 

Its been found that over a 10-15 year period, the vast majority of actively managed funds underperformed the S&P 500 (500 largest U.S. public companies).

“Every year, S&P Dow Jones Indices does a study on active versus passive management. Last year, they found that after ten years, 85% of large-cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index” – CNBC.

In order to outperform major stock market indices in the long run, you would have to put in much more work to choose individual stocks and beat over 90 percent of professionally managed funds.

So if you don’t want to put in the extra work and take on the extra risk, what should you invest in? Index funds.

“An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets” – Investopedia.

At first, index funds weren’t popular, with their just average returns dismissed. But over time, they gained popularity, now with $4.27 trillion dollars invested in them, in just the U.S. alone.

Warren Buffet, known as one of the greatest investors of all time, agrees that investing in index funds is a great way to build wealth.

“A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals” – Warren Buffet.

And index funds are usually even safer than ETFs because they are typically more broadly diversified, have lower costs, and are focused on steady growth.

Types of index funds

But how do you actually invest in index funds? Well, it’s not that complicated. 

There are two main categories that index funds fall into: Mutual funds and ETFs. 

ETFs trade just like stocks; you can buy or sell shares of them when the stock market is open. Mutual funds are similar to ETFs, but they have limitations on when and how you can buy or sell them and often have minimum investment amounts, making them unideal for teenagers. Instead, you should buy index funds that are ETFs. Here are a few to consider:

SPY

SPY is an index fund that tracks the S&P 500. “The S&P 500 Index, or the Standard & Poor’s 500 Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies” – Investopedia. It has an expense ratio of 0.09% and its top holdings are Apple, Microsoft, Amazon, Facebook, Alphabet ‘A,’ Alphabet ‘C,’ Berkshire Hathaway ‘B,’ JP Morgan, Tesla Inc, and Johnson & Johnson.

QQQ

“Invesco QQQ is an exchange-traded fund that tracks the Nasdaq-100 Index™. The Index includes the 100 largest non-financial companies listed on the Nasdaq based on market cap” – Invesco. It has an expense ratio of 0.20% and its top ten holdings are Apple, Microsoft, Amazon, Tesla, Facebook, Alphabet ‘C,’ Alphabet ‘A,’ Nvidia, Paypal, Intel.

Evaluating stocks 

Even though investing in individual companies requires more work and risk-taking, successfully picking individual stocks to invest in will likely generate a much higher return. This is why people often opt to invest in individual companies. Here are some tips to help you evaluate what stocks to invest in.  

Research

Researching a company and understanding what they do is a necessary part of investing in individual companies. First, you should understand their products and service. A quick google search should provide you with all the answers you need to have a basic understanding of the company. Then you should look into factors like their leadership, future plans, as well as gain a better understanding of the company as a whole. The other big thing to consider is their core financials. Look into factors like its revenue, margin, debt, cash on hand, and growth over time. Researching all of these things should give you a foundational understanding of the company.

Growth

A companies growth potential is the most critical factor you should consider before investing in a company. To make sure a company has significant growth potential it should be in a new or growing sector, gaining market share in its sector, selling new products or services, or increasing its profit margins. These are by no means all the potential growth factors to consider but should serve as a good starting point to evaluate a company’s future potential growth.

Competition

A company also must have a significant advantage over its competitors to make sense as an investment. Whether it’s a cheaper product, better product, has more name recognition, etc., it’s crucial that every company you invest in has an advantage over its competitors.

Risks

Another important factor to consider is the risks to a companies success. Risks could include government regulation, difficulty with mass production, lack of funding, etc. Make sure to take into account these risks before investing in a company.

Diversification

Diversification is a key part of a healthy stock market portfolio. Investing in many companies in different sectors will prevent major loss in case a particular segment of the market drops in price. You should aim to have at least 20-30 stocks across different sectors in order to maintain a diverse portfolio. 

You can read my full article about evaluating stocks here!

Portfolio allocation

And remember that investing in index funds or other ETFs doesn’t mean you can’t also invest in individual companies of your choice. For example, you could invest half of your portfolio in index funds and choose the other half. This will still help you diversify your portfolio, generate more consistent returns, as well as give you exposure to the upside individual companies could provide.

Particularly as a teenager, you can afford to take more risks because you’ll have more than enough time for your companies to recover from market downturns.

How to become a millionaire

What’s so amazing about investing is the snowball effect of compound interest.

“Compound interest is interest earned on money that was previously earned as interest.” – thebalance.com 

For example, let’s say you invest $100 and make 10% interest every year. The first year you will make 10 dollars (10%), but next year you will make $11, an additional one percent. Each additional year you keep your money invested, you’ll make more and more interest. 

Of course, in real life, you won’t make a guaranteed 10% on your investments each year, but the power of compound interest is still significant. 

Investing consistently over a long period of time will allow you to take advantage of compound interest and eventually become a millionaire. If you were to invest just $100 each month for 50 years, assuming a 9% average rate of return – which is the approximate average return of the S&P 500, you would have $1,017,819. If you were to invest $1000 a month instead, a number that is achievable for most adults with a full-time job, it would take only 25 years, and by 50 years, you would have over 10 million dollars.

You can use this calculator to see how much money you’ll make from investing.