Fidelity Just Made It Easier for Teens to Become the Next Warren Buffett

In May 2021, Fidelity Investments announced a new Fidelity Youth Account aimed at making it easier for teens ages 13 to 17 to save money and become individual investors. In a few years from now, we may look back on this event and realize that it was just the beginning for a new line of young investors looking to become the next Warren Buffett, owner of Berkshire Hathaway. The self-made billionaire made his first investment in stock at the age of 11 and had made — in today’s equivalent — $53,000 by the time he was 20.

This new youth account from Fidelity will allow teens to be the owner of the account. They can make investments in all Fidelity mutual funds and most exchange-listed securities of small and large public companies.

Image source: Getty Images

Encouraging young people to invest

As I’ve repeatedly told my own kids as they’re growing up, it’s never too early to start investing. It doesn’t always have to take the shape of stocks, index funds, or bonds — it could take the shape of professional athlete player cards, rock band merchandise and vinyl albums, or coin collections. But I can clearly remember my father helping me select what I leisurely refer to as the Invesco Dynamics fund nearly 30 years ago as my first real investment, and it’s something I’ll never forget.

If you want your child to develop an interest in the stock market, having access to a youth brokerage account in which your teen is fully involved might set them on the road to riches., An index fund, such as the Fidelity Total Market Index Fund (NASDAQMUTFUND: FSKAX), with a 10-year average annual return of 14%, may provide a solid investment base to start with. This fund has been around since 1997 and currently requires no minimum investment amount.

This index fund invests approximately 80% of its assets in the Dow Jones stock market index, and counts Buffett’s own Berkshire Hathaway in its top 10 holdings. An investment of this nature allows teens a good entry point, while providing time to get comfortable with the research and understanding necessary to be a more informed stock-picker. This can help build returns while reducing the risk of being too heavily invested in any individual stock at a young age.

How much money are we talking?

In the table below, I’ve laid out a scenario in which a high schooler starts a job at the age of 16 working a 12-hour workweek, and works for two years making a consistent average part-time hourly wage of $13 per hour.

Year of Earnings
Total Hours (52 wks /
12 hr Workweek)
Total Wages
($13/ Hr Avg)
Tax Rate
(10% Up to $14k)
Usable Cash for Investing
Return
(9.5%)
Total Value After 12- Month Period

Year 1

624

$8,112
($811)
$7,301
$694
$7,995

Year 2
624
$8,112
($811)
$15,296
$1,453
$16,749

Year 3
0
0
0
$16,749
$1,591
$18,340

Year 4

0
0
0
$18,340
$1,742
$20,082

Year 5
0
0
0
$20,082
$1,908
$21,990

Year 6
0
0
0
$21,990
$2,089
$24,079

Table by author. Data sources: ZipRecruiter, Bankrate.com, thebalance.com.

From this table, one could determine that total earnings of approximately $8,100 for two consecutive years can turn into a potential $24,000-plus by the time a 16-year-old investor turns 21, assuming none of these funds are touched during that time period, based on an average annual return of 9.5% for mutual funds. That rate of return is the result of two pieces of data. Over the past 10 years, the Fidelity index fund averages 14% annual returns, during which we’ve experienced a bull market. Dating back to the last bear market, taking into consideration a five year period between 2007 and 2012, the market experienced a 4.7% return again, which included a one year negative average of 15.8%. Taking the average of these two gives us a 9.5% figure.

As you can see, the numbers are based on no employment and no earnings for the final four years. All money generated during that span is coming from return on original investment (ROI). For newbie investors, it’s important to note that the annual returns compound, which means they continue to add upon one another from year to year.

The numbers shown in the table reflect the potential based on the average mutual fund annual return across the past 10 years (9.5%). However, if you take the average annual return of the Fidelity Total Market Index Fund — 14% — the amount available at the end of the same time frame as shown in the table could become $30,082 based on the same earnings shown in year one and year two. That’s an additional $6,000 coming strictly from potential higher annual returns.

Learn from the best

To become the next Warren Buffett, young investors can take the opportunity afforded by new youth investing account features and apply the same rules that Buffett has applied successfully in his own strategy:

Keep costs minimal: Invest in index funds, which are diversified across multiple individual stocks (i.e. Vanguard Total Stock Market Index Fund noted above)
Ignore the chatter: Sticking with index funds allows you to avoid the daily details and news about each and every individual stock
Invest for the long term: Over the long term of the market, the trend has gone up, despite short term volatility at times

Following the thoughts of Buffett and referencing the table provided can show investors what a six-year investment might look like for a teen who opens a Fidelity youth investment account today with just one to two mutual funds. It may or may not result in today’s investors becoming the next Warren Buffett, but imagine what those numbers might look like 40 to 50 years from now with annual compounded returns. All it takes is a small consistent investment, some research, and disciplined patience.

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Jeff Little has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short June 2021 $240 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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