“I am turning 18 soon, I have an account shared with my dad, but are there specific funds I should invest in? For example, Roth IRA, Target Date Fund, and should I invest in foreign markets/am I even old enough to do that? Or should I stick to investing in companies I think will do well and stick to those?”

Congratulations on having the interest and means to save and invest at a young age! I absolutely love helping people get started with investing especially at a young age. You have a super power on your side: time! Compounding interest really is the 8th wonder of there world.

I recommend the following general points

  • Roth: Use Roth accounts as much as possible. Tax-free-forever!
  • Low-Cost Index Funds: Understand the different classes of assets and their historical performance. 
  • Individual Stocks: If you want to invest in companies, go for it! Learn about investing while you are not risking “too much” and more importantly, how you feel about making (and losing) money. 

Matt and Mike discuss the situation of this young person and how to get started. Resources include:

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcript
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That also appears in the capital closeup podcast feed Mike. 


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So the email is financial planning pod@gmail.com. 


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Like he really broke these things down. It was super interesting and scientific. Anyway, it was totally fascinating. We also do financial planning. This is reminding me of that episode of parks and rec where people could call in with any question about anything. It's Hey, I have a scratch on my table. 


What are you doing? Rub it with a Walnut that'll cover up the scratch. It's good information. But if you want financial planning information, this is where you come. So check out that email or the Facebook page. So here's a real question from a real life person, a young person, and he writes, I'm going to read this off. 


I'm turning 18. Soon. I have an account shared with my dad, but there are there specific funds I should invest in, for example, Roth. Target date fund. And should I invest in foreign markets? And am I even old enough to do that? Or should I stick to choosing companies I think will do well and stick to those great series of questions on the theme of what do I do if I'm a relatively young investor, Mike Morton, you're a young person now, not really. 


What should you do if you're a young investor? 


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Part, then you don't get the opportunity to invest. And so that's always step one. And if you're doing that, if you are saving something for the future, you're already winning at this game and setting yourself up for success. So that is just great, knowing that even if you make mistakes along the way, like we all will, around investing at least you're starting off and putting something, putting something out there, getting going, and you will definitely. 


Rewarded in the future. So that's fantastic. Now there's a lot of questions in here, so we're going parse it out and give some advice for young people. And I also love this question because there's a lot of students out there, whether they're high school college, I'm thinking of a lot of the listeners right now, tuning in have kids, that are, 16 or 20 or 25 that they can also listen into this advice and pass on to their child or send them the podcast, send them to the YouTube video and they can check it out there. 


So let's dive into. Where do you even get started with this? The first thing is just to get started when you are young and you can invest for the future. You have a long time horizon ahead of you. And that is one of your superpowers being young, because the compounding interest, the eighth wonder of the world. 


Is really going to be in your favor if you're starting young, even starting at, 20 years old, by the time you have 40 years ahead of you toward that quote unquote retirement age and you just let money sit there and compound it is going to really work to your advantage. So whatever you do get some money in there, get it invested, get going and let that compounding work for you. 


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Got a big chunk of money from his dad. And he talks about how, he made a lot of money over the years. Maybe he did. We don't really know, but if he had just invested in the stock market, if you just take it everything and put it into a stock market index fund, he would have had more money than he claims to have now, just because of the rise in the market. 


Rise in the market compound interest, amazing stuff. So you're off to you're off to a good start. So what about some of the specific questions underneath that? What about he started off with or she's sorry, I shouldn't assume. He or she started out with Roth. IRA. What do you think about that one? 


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And you can go back to an episode I just had with Megan. From Marotta on wealth and Miranda on money blog. And we had a waterfall which accounts to save where, so when you've had that extra a hundred dollars, where do you save it? Okay. So check that out. But in general, I highly recommend the Roth IRA to put money in as much as possible into that. 


It's tax-free forever. So that's great. Your future self will definitely thank you for having this compound growth that will never, ever be taxed. And the other reason is , because you're young, you're probably in a very low tax bracket. And so therefore take the tax hit. Now at that very low tax bracket, you'll pay the taxes. 


Now, when it goes in the Roth IRA, and then inside the Roth. You can do invest in, you can buy individual stocks, you can buy mutual funds, you can buy ETFs, you can buy all kinds of stuff inside of your Roth IRA. So my best recommendation will be if you can, and you're young, get it into that Roth IRA as much as you can every year. 


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At some point, you don't want to pay him when the rate is going to be higher. So makes all kinds of sense. So Roth IRA, you pay the taxes upfront and then that's it. 


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That's your 401k or your traditional with the capital T IRA. And there you take it off of your tag. You'd not pay taxes now and you'll pay them in the future. All right. Young low tax bracket got long runway. You don't want the compounding growth to pay taxes on that later. That's why you don't want to use the traditional. 


So say you're a 24 year old and you're getting that first job and getting your 401k use the Roth side of your 401k, not the traditional side. Why? Because if you put in 10, a hundred dollars today and it grows to $10,000, 40 years from now, you'll pay taxes on the whole 10,000. Whereas right now you only pay taxes on the. 


Okay. That's another reason you don't want that. All that compounding growth to compound and pay taxes on that big account value in the future now. 


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And so you've had a 401k in your first. Maybe you're fortunate enough to have 401k. Now you're switching to another job. So would it be a good move while you're still in a relatively low tax bracket to roll over that 401k to an IRA and convert it to a Roth. Now 


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fund 


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So let's talk about this a little bit. Target date funds are a, we've had that episode, on here all about them. It's a mix of stocks and bonds. When you're 18, they're going to put you, you're going to buy a target date fund for 20, 75. We wouldn't those exist yet, so the far in the future, they're invested 90% in the stock market and 10% in the bottom. 


Now if you're 18, I don't even know why you'd have 10% in the bond market. This is money you're putting away for 40 years. And I'm trying to remember if any 40, I think there's a small percentage, two to 3% of 40 year time horizon. In the past history that have outperformed the stock market. In other words, it barely ever happens. 


a target date fund. If you're:

going down by 20 or 30%. 


You haven't lost any money. You're not spending that money for 40 or 50 years. You haven't lost anything. Okay. So that's so you don't even look at the statements 


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Okay. So the rate of return for the last 92 years is just about 10%. Okay. For the large stock market. That's the average rate of return over the last 92 years, 10%. That's pretty good. You're getting 10% kind of year in and year out for the next 40 years. Talk about compounding. Oh my goodness. I'm actually now becoming very jealous. 


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over $6,000, hundred bucks, simple, a hundred bucks. Okay. So it compound is crazy. All right. So there's the U S so that's like a total us stock market or the S and P 500, those large companies were getting about 10%. 


Can we do better than. yeah. 


potentially. Potentially. So let's go down to one of my favorites, the U S small cap value. All right. So quick refresher, you've got big companies and small companies. All right. This is what we call market capitalization. But just think of it, how big the company is apple, Microsoft, Amazon. 


These are massive companies. They are big companies. The little companies you don't really know, but there are public companies, thousands of. That just aren't that big, but they chug along. They're making, the products inside of your cars or, the chips inside of your cell phones, all those things. 


And so there's thousands of these smaller companies. All right. So we want to invest, maybe invest in those small companies and then the value. There's a value side to these companies or growth side certain companies and the growth, certain companies are in the value. I'm not going to get into it now, but the academics. 


Okay. Love to research this over the past 92. Which has done better big companies or small companies. Hey, let's draw a line in the sand where big and small is, and we can measure this stuff now and get data and slice and dice it same with value and growth, certain metrics. Hey, draw a line in the sand. One half of the companies are value. 


One half of them are growth, and let's measure and see, which has done better. Now, there are low cost index funds that you can invest in just small companies. Cool. Or we can just invol invest in small cap value companies. So let's look at the historical returns, man. I told you for big companies here in the U S 10% a year, the small value companies over the last 92 years, over 13% a year 


Now 10%, 13%. 


You're like, geez, it doesn't seem like that big a difference, but the compounding is amazing. So that is just going to work out in your favor, potentially over a long period of time holding that small cap value fund instead of just a S and P 500 fund 


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Index fund for small cap value and then add to that portfolio over time. Then once you get into your late twenties and thirties, you can start buying some other parts to round out the portfolio, but you're letting this initial investment ride for the longterm. Let me give you another example of where this recommendation comes in. 


I talked to a lot of parents that have very young kids. Okay to your old five-year-olds Hey, and they're interested in investing, I'm talking to the parents, right? And they say we like investing. Maybe my kid's interested in getting to be eight or nine, or they know that this compounding effect for the longterm. 


So you can, for a newborn or you can, or if you're about to have a kid or you got a five-year-old, you could set aside some money just in the ear market for them. It doesn't have to be in their account necessarily, but there are ways you can. And you can invest a few thousand bucks, a few hundred bucks, a few thousand bucks. 


Now you're not starting when you're 18, but you're starting with the kids too. 


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And again, set it and forget it put in 400 bucks just in this one fund. And there it is for the next 50 years. 


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You can do country-specific. You can do total ex what we call ex. So everything, that's not us, but a globally diversified portfolio of everything. It's not us, all those come in low cost index funds. And there's great. Again, the academics do research, on how they've performed over time. And so definitely I would do some, what I would do for this person is start doing a little research. 


I've mentioned a bunch of different what we call asset classes, big companies, small companies, et cetera. So do some research on those start to learn, what are these asset classes? Where are the investments, how do they look and feel what has been the historical return? That would be some great knowledge for investing moving forward. 


And then finally, I did want to hit on the idea, should I choose individual companies, invest in what I know. And that's another great idea in, especially in terms of learning about investing. So I would definitely take some more. And say, great, I'm going to put a hundred dollars into Nvidia or Activision or, whatever you're interested in Snapchat or Facebook or whatever it is and say, I think this company is going to continue to do well. 


I want to take a hundred bucks and put it in there, get to know the markets, get to know how it feels to you as your investment is going up and down. And really learn that while you're young with not too much money while there's not a lot at risk. 


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They found a company they liked and they stuck with it. So good. All around advice. Congratulations to our listener for getting interested in all of this. So early on, it's going to do you well in the long-term Mike Morton. Thanks for all of the guidance. 


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