You Too Can be a Wall Street Whiz Kid...teens are learning the sooner you invest, the richer you'll be.
Lesson No. 1: There's no age minimum for making a profit from investing.
Just ask Jason Orlosky, 21, a 2000 Hopewell Valley High School grad and a junior at Babson College in Boston. Jason started investing in 1994 after receiving $5,000 for his bar mitzvah. In the next five years he became an early investor in CMGI, a Massachusetts firm that owns stakes in Internet companies. Through the mid-to-late 1990s, Jason took a nice ride on the tech-stock wave, watching shares in CMGI grow from $3.50 each to around $280. After pumping an additional $5,000 into his portfolio in his late teens, Jason's original investment had grown to $342,000! The year before he graduated, Jason moved about $80,000 of his portfolio into more conservative mutual funds, recognizing he would need to soon use the money for school. The only other time he had touched his investment was to buy his mom's used Ford Explorer for $17,000 when he got his driver's license.
Not long after graduation, Jason learned the hardest lesson of the stock market: what goes up, must come down. The now infamous dot-bomb period in the past few years, during which technology stocks bit the dust, shook up Jason's tech-heavy portfolio a bit. Consider CMGI, which now trades for less than 50¢ a share. Ouch! "I definitely got hit hard," admits Jason, fresh off a summer internship with Pricewaterhouse Coopers and a stint at the London School of Economics. "My portfolio lost about 40% of its value. Even so, I still have a great record and great returns. Over eight years my portfolio has averaged a 41% return each year."
Pennington resident Janet Bamford, author of Street Wise: A Guide for Teen Investors (Bloomberg Press, $16.95), uses Jason's example, and that of other teens around the country, to help illustrate the power of early investing. What's the biggest regret of most investors? That they didn't start sooner! While Bamford admits Jason's example is quite extraordinary, she offers another more realistic example that speaks to the power of early investing: Had you invested $10,000 in the Standard and Poor's 500 stock index in 1978 and reinvested all dividends, 20 years later your shares would have been worth $244,279.
Standard and Poor's, reinvested, dividends. Yes, the stock market has a lingo all its own. But once you tackle a few basic terms, the fundamental means of communication is dollars and cents. Bamford, whose book is full of explanations, useful tips and inspiring teen stock stories, says young investors need to embrace a few golden rules—starting with the fact that time is on your side. Invest a little, leave it be, add some more, and chances are you'll be happy with the results. A few more quick hits:
1. Comprehend Compound Interest. At its most basic, says Bamford, compounding means that the interest you make on your money also earns interest. Think of it this way: If someone offered to give you a penny that doubled in value every day for a month, at the end of 30 days of daily doubling, that penny would be worth $5.4 million! You're continually doubling the previous day's doubled value—2›, 4›, 8›, 16›, 32› and so on.
2. Diversify, Diversify, Diversify. One of the most important rules for investors is to NOT put all your eggs in one basket. Invest in a variety of companies and invest in different types of assets, like bonds.
3. Tax Talk. Know the fees involved, including the cost of investment transactions, to how much you will be taxed if you try to cash in on an investment. If you're over the age of 14 and make more than $700 a year in unearned income from an investment, for instance, you have to file your own tax return.
Bamford urges teens not to feel intimidated. Stock market concepts are relatively easy to understand, and the financial returns from even a bit of early, long-term investing can be amazing. "The great thing about investing is that you can start slowly, bit by bit, and get more deeply involved as you learn more," says Bamford. "If you're interested, talk with your parents, ask questions about how they picked their mutual funds and stocks."
The Internet can be a valuable teaching tool, offering information Web sites and even stock-picking simulation games that let you own a portfolio without using real money. Be careful, though, warns Bamford. Some Web sites lead you, after a few clicks, to a real trading and investing function. A game should never request a Social Security number or other personal financial identification from you.
As for Jason, he has changed his investment strategy. When President Bush came into office Jason put more of his money into defense stocks, a move he says has proven lucrative. "If you put time into researching companies you get a much higher rate of success," Jason says. "You do your homework in school, you get a grade. You do your homework in the stock market, you get money."