When he was 16 and got his first job, my nephew (wisely) expressed an interest in starting to invest. I sent him some unsolicited advice, and I’ll share it here as well. Please let me know in the comments if you have any questions or if there is anything you think should be added or changed. And note that he’s in the US, but I think this advice would apply equally well in Canada (swapping the Roth IRA for a TFSA).

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TL;DR version

Here’s all the investment advice you really need, as concisely as possible:

• Save (and invest) 20% or more of your income.
• Only invest in things you understand.
• Avoid fees (e.g. expense ratios for ETFs and mutual funds, loads, commissions) as much as possible.
• Diversification (investing in lots of different things at once) is key.
• Buy and hold.  Invest for the long term (5+ years at a minimum, and ideally more) and DON’T PANIC (i.e. sell) when things go down.
• Pay your credit card balance in full every month.
• Take advantage of tax advantaged accounts (e.g. IRAs) and employer matched accounts (e.g. 401ks) as much as possible.

A Bit More Info

So, what does this mean, exactly?  If I were you, I’d put whatever money you can into an “all-in-one” ETF or mutual fund.  The difference is that ETFs trade like stocks (meaning you buy them through a broker and may pay commission) while mutual funds you buy directly from the fund provider (for free).  The advantage of ETFs is that you don’t need to hit a minimum to invest (some brokers even allow you to buy fractional shares) but the downside is that you may have to pay commission when buying and / or selling.  Here in Canada, there are brokerages nowadays that offer no commission ETF trades, and I assume there are similar deals in the US.

If I were you, I’d do an ETF if I could trade for free, but I might wait until I had enough for the mutual fund minimum (e.g. $3000) if I couldn’t.  For ETFs, I like the look of something like AOA from IShares — it gives you great diversity with a good asset allocation (80/20 stocks to bonds, with some international exposure) and the fees are very low.  If you’re going the mutual fund route, I’d go with something like VASGX at Vanguard, which is very similar.

Once you have more money ($10,000+, or so), you might want to add some nuance, but honestly if you just did the above forever, you’d be in great shape.

And, since you’re young and will not owe a lot of taxes, I’d strongly encourage you to invest in via a Roth IRA (which you can open at the broker or mutual fund company).  It pays to read the fine print here, as some folks have stupid fees.  Investing is actually really simple, but the whole industry tries to make it seem really complicated so that they can get away with charging high fees.

The great thing about Roth IRAs is that you are paying all the taxes now, and then they grow tax free and whatever money you take out is totally tax free.  They are awesome when your income is relatively low.  Generally speaking, you can’t withdraw from an IRA until you’re 59.5 years old (there are some loopholes, though) so only put in money that you won’t need before then.  And you can contribute up to $7,000 per year.  That space doesn’t roll over, so if you don’t use it, you lose it.  I can’t recommend Roth IRAs highly enough, they are really, really good places to invest.

You’ll hear about all sorts of investment ideas – stock picking, gold, crypto, etc.  Some reasonable folks allocate a small portion of their investments (e.g. 5%) to these types of things, but I don’t.  I did stock picking when I was young (and did OK) but the reality is that you can’t reliably beat the market, so there’s no point in trying.  Just invest in the whole thing (by doing the above).

And, for me, gold and crypto fall in the “things I don’t understand” bucket, so I don’t invest in them.  I mean, I understand them, but I don’t understand why they have any value.  Both seem like collectibles to me, and I don’t trust collectibles to still have value in a few decades, which is when I need it.  Stocks, on the other hand, are pieces of real companies that do actual things to earn actual money, so I have more faith in them.  That doesn’t mean you can’t make money in collectibles – some people absolutely do – but I don’t believe you can reliably do it without insider knowledge, which I don’t have.  Investing in low-cost index funds, on the other hand, has worked consistently for at least 150 years, and requires no special knowledge.

And a note on credit cards – personally, I love credit cards, but not everyone agrees.  The reason I love them is because I have gotten a lot of free travel from them via sign-up rewards (aka travel hacking).  This can be a very useful game to play, as long as you are always careful to pay your full balance every money.  If you don’t do that, avoid credit cards at all costs.  The interest rates are insane.

I could say much, much more about this, but this is already probably too long.  Again, please don’t ever hesitate to reach out (tomorrow, twenty years from now) if you have any questions.

Love,
Uncle Dave