When I was in middle school, my computer class curriculum was full of Mavis Beacon’s typing lessons, learning how to use MLA style and making our own Word Art. We also used a less common application: the Stock Market Game.
The concept was simple. Each pair of players in my class selected a stock and monitored its ups and downs. The team that made the biggest gains at the end of a few weeks’ time earned a coveted $20 to spend at the local mall. My partner and I ultimately won the game, but the investing takeaways are not at all how I would use my money today.
What could have been a great opportunity to teach the class about all the different ways you can invest in the stock market without banking on an individual company was lost on us. And even though the game did spark my interest in learning more, there was nowhere for a 12-year-old to get accessible information about investing. Only years later did I learn what to do.
Investing is an important way to build wealth and save for the future. Here’s what we should have learned about the stock market.
1. Time equals money
In our game we waited a few weeks to see a profit, but what if we gave it more time? What if we even waited decades? That’s the magic of compound investing. When you give your money enough time to start earning interest on its interest, you can reap bigger rewards without any extra effort.
For example, let’s say you invest $100 into the stock market to take out when you retire at 65, assuming a 7% annual return. If you invest when you are 25, you will have almost $1,500 when you are ready to retire. But, if you put that same $100 in at 35, you’ll only have $761 when you take it out. The extra decade of compounding interest makes a huge difference in the outcome.
The lesson we should have learned is the best time to invest is as soon as possible. Even taking into account the ups and downs of the market, historical investors see returns.
2. There’s more than one way to invest
The Stock Market Game was an important introduction to the basics of how stocks work — you buy shares of one company. But the many other ways to invest were left out.
Diversifying your portfolio is really important. You don’t want to put all your proverbial eggs in one basket; you should have a little bit of money in several different kinds of investments. Here are a few of the big ones:
- Mutual funds, ETFs (exchange-traded funds) and index funds: These are professionally managed funds that pool money from many investors to buy into bigger securities. You can buy funds that reflect major indices, like the Dow Jones or S&P 500, or for different kinds of companies, like tech or women-founded companies. Always look into the fees associated with a fund before you buy it.
- Retirement: People frequently say they are saving for retirement, but really, they should be investing. Once you have an account for your retirement savings, like a 401k or an IRA, you need to select how to invest it. One common method is a target-date fund that you choose based on the approximate year you plan to retire. That way, you can let compound interest work its magic.
- Bonds: Bonds are like IOUs. When a company or the government needs some cash, you can buy a bond, giving them the cash up front, and it will appreciate in value over time when the company ultimately pays you back. Bonds are generally considered a low-risk investment compared to stocks.
3. Choose the investment that meets your needs
There are many ways to invest without ever buying an individual stock, and what you buy will depend on your needs. First, consider your time horizon, or when you are going to need access to your money, and then you can gauge your level of risk based on that timing. If you need the money soon, the stock market might be a riskier place to invest — if there’s a recession, it could take years to recoup your losses.
These factors will change person to person and goal to goal. The way you might invest money to buy a house might look really different than the way you invest for retirement. Either way, there are plenty of options for you to choose from, no matter your financial goals.