Setting Financial Goals

There's a big difference between mid-range (three- to five-year) and long-range (10-, 15-, even 50-year) goals. So it's important to talk with teens about why they're investing. Is it for a car a few years down the road? Or maybe for retirement at 60?

Since goals are more likely to be achieved when they're written down, sit down with your son or daughter and list the goals, and how much money is needed to reach them.

Deciding How Much Risk Feels Right

The reality of investing is that markets go up—and they also go down. Virtually any investment has some risk involved, so it's very important that teens, and any new investors, understand this.

Deciding how much risk you're willing to take is one of the first and most important steps for any new investor. As the following chart shows, investments that have the greatest potential for return also carry the greatest risk. 

The amount of time you have to invest will have a large impact on how much risk is appropriate. The further out the goal, the more aggressively your teens may want to invest, since there's time to recoup any potential short-term losses from the natural ebb and flow of stock performances along the way. As their goal gets closer, they'll want to shift to more stable (conservative) investments.

As a general guideline, if you know that you will be using your money in three years or less (let's say your teen is saving for a car), you should not be investing in stocks. They're just too volatile. If your time horizon is three to five years (perhaps for a college fund), it may be appropriate to invest as much as 60% of your money in stocks (depending on your risk tolerance), with the balance in bonds or cash equivalents. Once you start looking at longer-range goals, say five to 10 years or longer, you can then add even more stocks to the mix.

 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of savings and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction or strategy for his or her own particular situation. The examples mentioned are for informational purposes only and not intended to represent results you should expect in the future. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.