Is Your Teenager Heading For Millionaire Status?

Back in 2001, I began an experiment. FTSE All-Share index trackers were just beginning to catch on, and I began regularly investing in one, topping up my monthly investments with occasional lump sums.
In 2009, I ceased adding new money, and re-directed the regular monthly savings into my ISA-sheltered portfolio of higher-yielding income shares. For someone in their mid-fifties, it was a strategy more in keeping with my retirement plans.
By then, the tracker investment stood at just under £25,000, around a quarter of which had been in the form of lump-sum investments over the previous two years — including a couple of small inheritance bequests. And I left it to grow.

Today, I’m up 65% in terms of the ‘new money’ invested. And at the FTSE’s recent peak of 7,104, in April 2015, I was up 89%.
And had I invested the money more evenly across the period — or skewed those hefty lump sums towards the beginning of the period, rather than the end — the returns would have been even greater.

Wealth engine

All of which I mention because a friend and I were chatting yesterday about how best she could invest some money that her 16-year-old son had accumulated in NS&I bonds.
Regular readers won’t have any difficulty predicting my reply.
Rather than accept the derisory interest rates on offer by banks, building societies and NS&I, in my view it makes more sense to harness the power of the stock market’s long-term wealth-creating engine.
In other words, invest the money in a basket of shares in solid, well-managed businesses — businesses with a long-term record of growth combined with throwing off cash in the form of dividends.
For decent-sized sums of money, it can make sense to invest directly in the businesses themselves. But for smaller nest eggs, a low-cost index tracker is probably the best way to get a taste of the stock market’s wealth-building properties.

Shares vs. cash vs. bonds vs. property

Of course, that’s guidance that is suitable for most people with a reasonably long-term time horizon.
It’s not generally a good idea to invest money in the stock market that you’re going to need next month or even next year.
But over the long-term — and especially when you’ve some discretion about when (or if) to liquidate a stock market investment — studies repeatedly show that the stock market outperforms cash savings and bonds.
And stock market investments also have a very distinct advantage over property investments: it’s impossible to buy property with the modest amounts of spare cash that most people have.
You either buy all of a house, or none of it. Ditto when it comes to selling, of course.
Not so with shares.

Time horizon

But there’s another reason for thinking about the stock market in the case of someone still in their teens.
At 16, they have an opportunity that isn’t open to many of us: the opportunity to let the power of the stock market do its stuff over the seriously long term — 50 years or so.

As I’m now in my very early sixties, a 50-year horizon is of no interest to me. But for the 16-year-old in question, it’s an opportunity to build a considerable nest egg with minimum effort.
How considerable? Let’s do the sums.

Making a start

Assuming a fairly conservative 7% long-term annual return, £5,000 invested in the stock market will have grown to £147,285 after 50 years.
Throw in another £25 each month, and that grows to £300,898. Make that £50 a month, not £25, and the outcome is £437,894. And any 16 year old with a Saturday job should be able to find £50 a month, if the will to do so is there.
I could go on, but I’m sure you get the idea: with a 50-year time horizon, remarkable things are possible — including millionaire status.
My kids have brokerage accounts, and (modest) shareholdings. Do yours? If not, it could be time for them to set out on that remarkable journey.

Foolish Final Thought

Here at the Motley Fool, we focus on investing in great businesses for years rather than months. It's over that kind of time horizon that we can make sensible judgments on how a business is likely to perform, and whether the price is right.

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