What Young Investors Should Know About the Stock Market

Roller coasters rise and fall, twist and turn. Whenever there’s a line for such a ride you always see people who are nervous. Some people decide to avoid the ride altogether.

Many potential young investors feel this way the stock market. It's true that all investments carry risk and getting into the stock market is no exception. Like that roller coaster, markets come with its ups and downs. But the bottom line Gen X and Gen Y needs to understand: building wealth takes more than just saving in a bank account.

Understanding the stock market and being educated on investing wisely should be part of your financial plan.

Stocks Don't Have to Be Scary

The stock market in and of itself isn’t that interesting. Most days, nothing noteworthy happens -- and no one really cares on those days. But sometimes, the stock market does really well. And sometimes, it does very poorly (like we’ve seen recently). That makes all the news outlets giddy with excitement, because they can write dramatic headlines and stories that play off people's fears. Such articles drive clicks and views, which is the goal for media outlets.

Sensational news stories lead to knee-jerk reactions from investors. And yes, the stock market has been volatile in recent months. But that’s okay, because as young investors, Gen X and Gen Y need to be investing for the long run -- not for the short term.

If you zoom out on the graphs, you can hardly tell there was a market dip. Things will likely improve again -- eventually -- after a shaky couple of weeks. Remember that day-to-day stock market activity can seem scary, but it's all relative. Keep the big picture in mind, and know that historically the stock market averages about a 10% return and has always made its way back up after a downturn.

Young Investors Have a Big Advantage in the Market

If you're young, now is the time to start investing in the stock market. You have a big advantage on your side that older individuals, closer to retirement and the time where they'll want to start withdrawing from their assets, simply don't have: time.

You have the time to invest and earn returns, and have those returns compound over a period of years -- realistically, we're looking at decades of compounding returns if you're in your 20s or 30s. Compound interest means your money grows exponentially.

Quick Tips for Success for Young Investors

First, focus mainly on making money and living below your means -- not necessarily investing it perfectly from the get-go. Your savings rate is more important than picking the perfect investment. You have time to learn and continue to educate yourself, so it's more important to develop a savings habit.

Think long-term. Remember that you should be thinking about investments in terms of 20, 30, or even 40 years. A crazy day in the markets today is unlikely to mean anything decades from now. Don't panic, tune out the talking heads in the media, and stay the course.

Also, know that you don’t have to invest alone. While some people do go the DIY route, often choosing a passive investment strategy and implementing that with index funds, many others choose to ask for help from financial advisors. If you want to have a professional help you build wealth, ensure you're seeking a fee-only planner who is held to the fiduciary standard. The Find an Advisor portal with XYPN is a great place to start your search.

About the Author: Will Lipovsky is a blogger, freelance writer, and webmaster. Feel free to contact Will at First Quarter Finance.