Ask the Fool: Best Stocks for Young Investors

The market's vast array of potential investments looks doubly daunting to many new investors. With so many companies to choose from, how can you possibly know which stocks will be the best bets for your hard-earned bucks?

On The Motley Fool's Twitter feed, Foolish follower @millerum06 -- and many, many other Fools in similar straits -- asked us:

For young investors with steady income, it looks like the stock market is a smart risk -- any strategy for that demographic?

We've enlisted a panel of Fools to suggest their single best idea for newcomers to the market. Their suggestions aren't ironclad picks -- just candidates for your own further research. Still, the strategies they recommend, and the clues they use to find these stocks, could help you unearth your own ideal investments.

Save like an animal!
Morgan Housel, Fool contributor
Last week, Warren Buffett said, "My wealth has come from a combination of living in America, some lucky genes, and compound interest."

Since you're young, presumably American, and lucky enough to have a stable income, my only advice is: Don't forget the secret weapon of compound interest. Work like a machine. Save like an animal. Whatever material luxuries you're forgoing today are probably trivial to the wealth you'll accumulate by starting young. You won't regret it.

When you're young with a long time horizon, focus on investments with staying power. My favorite company for a long, long-term perspective is probably Costco (Nasdaq: COST  ) . There aren't many companies as profitable and encased in a milewide moat as Costco. Its membership-based business model makes its competitors' barriers to entry pretty thick. You can be fairly assured it'll still dominate its market space 10, 20, and 30 years from now.

The sweet smell of success
Dan Caplinger, Fool contributor
With a steady income that covers a normal budget, and an emergency fund for unexpected expenses, young investors can afford to invest aggressively in the stock market. With 30 to 40 years before retirement, you have plenty of time to ride out market ups and downs and cash in on long-term growth in the stocks you own.

Two stocks worth looking at are Mosaic (NYSE: MOS  ) and Agrium (NYSE: AGU  ) . Both are fertilizer companies well-positioned to benefit from the increasingly important problem of producing food for a growing global population. True, both of them have suffered recently from temporary earnings setbacks and uncertainties about their immediate future. But long-run trends are incredibly supportive for their businesses, and even a modest recovery in earnings could send shares soaring higher.

Go with Goo
Tim Beyers, Fool contributor

The best way to get started investing? Just start investing. Buy some stocks. Dollar-cost average into a small portfolio with very low transaction fees. And most importantly, don't buy anything complicated.

On this last point, I recommend Google (Nasdaq: GOOG  ) . Everyone knows the business, and most of us use its search engine daily. In that sense, it would be like buying shares of McDonald's (NYSE: MCD  ) or Coca-Cola (NYSE: KO  ) ; you know and use the products, and the chances of the stock going to zero are, well, close to zero.

But Google also has the advantage of growth. Unlike cloud computing, cheeseburgers and soda aren't new. And The Big G is a big-time innovator on the Web. Google Apps is challenging Microsoft's (Nasdaq: MSFT  ) Office, and Google TV could forever change broadcast advertising.

Opportunities such as these could enrich young investors' portfolios for decades to come, and only Google offers them.

But wait! There's more!
Thanks to Millerum06 and all the Fools who've sent us questions via our Twitter feed. We've gotten so many great suggestions from the know-it-alls here at Fool HQ that we couldn't fit them all in this article. Stay tuned for a second installment with even more strategies to get a brand-new portfolio off the ground.

In the meantime, if you've got questions about investing or personal finance, we'd love to help. Tweet them to us @TheMotleyFool, or leave a comment in the box below!

Prepare for disclosure in 3 … 2 … 1 … The Motley Fool owns shares of Costco and Coca-Cola. Costco is a Motley Fool Stock Advisor and Motley Fool Inside Value pick. Motley Fool Options has recommended a diagonal call position on Microsoft, which is also an Inside Value pick. Coke is an Inside Value and Motley Fool Income Investor selection. Google got the nod from Motley Fool Rule Breakers. Try any of our Foolish newsletter services free for 30 days.

Tim Beyers owns shares of Google, but neither he nor any of the other contributors own any of the other stocks they wrote about. Fool online editor and lead Tweeter Nathan Alderman owns shares of Costco. If you need the Fool's disclosure policy, it'll be having a bit of a lie-down somewhere quiet and shady.


Read/Post Comments (33) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2010, at 1:11 PM, YoungDude20 wrote:

    How is a young investor with steady income supposed to properly invest in Google/McDonalds/Costco when their share prices are so high? It is my impression that you should buy at least 50-100 shares of stock of one company when you commit so as to not increase fees. How am I supposed to come up with the cash to invest in these companies?? Thoughts?

  • Report this Comment On June 29, 2010, at 1:17 PM, TMFHousel wrote:

    Hey YoungDude20,

    Don't worry about the number of shares you're buying. It's the dollar amount of the investment that matters.

    If you have $200 dollars to invest, buying 100 shares of a $20 stock is no different than buying 1 share of a $200 dollar stock. At most brokers, the commission you'll pay will be about the same until you start buying thousands of shares at a time.

    Morgan

  • Report this Comment On June 29, 2010, at 1:18 PM, TMFHousel wrote:

    Er, that's *10 shares of a $20 stock.

  • Report this Comment On June 29, 2010, at 1:25 PM, Mstinterestinman wrote:

    If your young a company with strong growth is worth a look as well such as GMCR or EBIX.

  • Report this Comment On June 29, 2010, at 1:26 PM, Mstinterestinman wrote:

    Also don't ignore blue chips JNJ,MCD,KO about as close to risk free as an investment can get.

  • Report this Comment On June 29, 2010, at 1:56 PM, skimonkee wrote:

    @YoungDude,

    ...and if you're trying to get into a high price-per-share stock like GOOG in smaller increment (ie $100 chunks), a service like ShareBuilder has worked well for me. You just need to make sure you stay focused on building a core group of stocks. It's very easy to get excited and invest $100 in 15 different stocks like I did when I first started. That won't help you at all.

  • Report this Comment On June 29, 2010, at 2:07 PM, YoungDude20 wrote:

    But each time you invest into a stock there is a new transaction fee, correct? So it would make more sense to invest $1000 toward one stock than it would be to invest $100 ten times.

    Brokers/Sharebuilder/ETrade, ect. all charge you each time you invest money, right?

  • Report this Comment On June 29, 2010, at 2:09 PM, YoungDude20 wrote:

    What do you think of a long-term portfolio consisting of:

    KO, PM, T, ORCL, COP, ABB???

    I have done my research and tried to diversify (as much as I could) with safe companies that provide decent dividends.

    Thoughts?

  • Report this Comment On June 29, 2010, at 2:19 PM, sid2286 wrote:

    Personally, I think that you should invest in a stable, blue-chip stock that pays a dividend and then re-invest the Div in more risky companies. Like purchase some P&G or MO and then use the dividend to buy a few shares of Famous Dave's (DAVE), Activision/ Blizzard (ATVI) or some company that you are interested in and would like to follow. Just be sure to do your research.

  • Report this Comment On June 29, 2010, at 2:20 PM, sid2286 wrote:

    @YoungDude20: well done.

  • Report this Comment On June 29, 2010, at 2:41 PM, TMFMMTInvestor wrote:

    @ YoungDude20:

    A good rule of thumb is to keep transaction costs to no more than 2% of your principal investment. For example, if your online broker charges $10/trade (and you can find many quality online brokers that are more affordable--I recommend Schwab, Fidelity, or Zecco), then you can initiate positions of no less than $1,000. Reason being: it would cost you $20 (or 2% of $1,000) to buy and sell your equity position in the underlying company. If you want to be more flexible and expect to hold the security for a 5-10+ period while reinvesting dividends at no charge, then I would be okay with initiating a position of no less than $500, assuming the $10 trade, Your compounded growth over time should more than make up for the eventual selling cost of $10.

    Hope this helps.

    Scott F.

    P.S. I also really like KO, PM, and, to a much lesser extent, T and COP. I think foreign telecoms and CVX or STO are better.

  • Report this Comment On June 29, 2010, at 3:06 PM, YoungDude20 wrote:

    I have heard of the 2% fee rule of thumb as well. Thank you for putting this into perspective.

    Any other tips for the young investor?

  • Report this Comment On June 29, 2010, at 3:38 PM, fennecfoxen wrote:

    My advice for the youngest investor just starting out is to *stuff a bunch of money in boring mutual funds or ETFs* (in your 401(k) plan, if you have one) until you've got a few tens of thousands sitting around and a nice little savings account for emergencies. When you change jobs for the first time and can roll it over into an IRA (traditional or Roth) *then* you can worry about investing in individual stocks, but for your $5,000 starter portfolio it just doesn't make sense.

    And if you see any ads for the Motley Fool Pro which sound like a used snake-oil salesman rambling on and on for 3 pages before mentioning that it costs something like $2000/year, then you should probably pass. (Seriously, guys, that's an *awfully* hard sell. You should be encouraging people to be skeptical of sales pitches like that, not making them yourselves. I'd be embarrassed if I worked for a place that sent out that sort of stuff.)

  • Report this Comment On June 29, 2010, at 3:54 PM, YoungDude20 wrote:

    Ha... @fennecfoxen I have ignored those banner ads for some time now.

    FYI - I have been working for a while now and have about few thousand in a retirement fund. I also have a few thousand in savings and have started to look into stocks now.

    I understand I am much further along in the investment business than most kids my age (I'm 22) but want to get more aggressive by loading up on stocks. Hence, my initial comments!

    Thanks everyone.

  • Report this Comment On June 29, 2010, at 4:20 PM, Borbality wrote:

    I like Sharebuilder, because they give you periodic free trades or credits, like for your birthday or for signing up initially or referring a friend. If you don't plan to make a lot of trades, you can do stuff for free. I got $50 for signing up, and if you do trades on Tuesday it's only $4. The automatic investment plan can be canceled at any time. So you can just put all your money into your stock at once and then cancel the automatic part (or just not have any money in your sharebuilder account for it to grab)!

    If/when I come into a chunk of cash, I (young investor) hope to buy some big blue chips with dividends (after paying down some personal debt!). Mutual funds aren't really doing it for me and I am afraid we're going to see another 10 years of mostly flat for the indexes. I would go riskier if I had more disposable income, but I think young people would be wise to get in on the dividends now, especially with treasuries so low.

  • Report this Comment On June 29, 2010, at 4:28 PM, PeyDaFool wrote:

    I'm a 27 year old investor who began stuffing his savings away in stocks last year. Using Tim Beyer's advice and "just investing," I had a 30% return on my investment and I was sitting pretty with an increasing net worth and a renewed sense of confidence about investing as the year came to a close.

    However this year, right before my very own eyes, most of the gains I made last year melted away as stocks retreated and I opted for a riskier portfolio with some very bad timing choices. I decided not to sell until a year or more passed in order to avoid tax penalties and the market really took me for a ride using this strategy.

    I've since changed my mind, vowing to first plug 10% of my pre-taxed earnings into my 403(b), then 5% of taxed earnings into a Roth IRA (which is nearly the max), followed by 15% of my taxed earnings into savings. If there's anything left over at the end of the month, I'll buy a value stock that's been beaten down by market conditions without any intent to sell in the next five years and reinvest all my dividends. I try to save up $1000 before investing in order to not pay more than 1% of my purchase on buying fees and 1% on selling fees.

    Additionally, I've begun savings for a house, which I feel is more important than individual stocks if you're stuffing as much as I do away into retirement accounts. So, to sum up things, here is my new investing list in order of importance:

    403(b)

    Roth IRA

    emergency fund (1.1% return with ING)

    down payment for house fund (1.1% return w/ ING)

    individual value stocks

    I'd like your opinion if you feel my money might be better invested differently, however, I've been making strides in my net worth since I've switched to this method.

  • Report this Comment On June 29, 2010, at 4:46 PM, plange01 wrote:

    at this point there is only one stock to own symbol CASH..

  • Report this Comment On June 29, 2010, at 4:55 PM, PeyDaFool wrote:

    ^^^ You're a little late owning that one; it's made a significant 300% run in the past year and a half.

    http://www.google.com/finance?q=cash

    :)

  • Report this Comment On June 29, 2010, at 6:54 PM, enxinas wrote:

    why not try index funds, then do the dollar-cost averaging technique? thats what im gonna do.

  • Report this Comment On June 29, 2010, at 7:20 PM, flymikefly04 wrote:

    Younginvestor - check out computershare.com. You can buy some stocks for free. A majority of the companies pay the fees, and you can reinvest the dividends, as well as dollar cost average. Don't believe me? Check out the website and look at XOM. They pay all the fees, and I put in $100 a month. I expanded to LMT and KO, with KO charging a small fee to invest in them.

  • Report this Comment On June 29, 2010, at 8:47 PM, mountain8 wrote:

    Black 24!*

    *just kidding. We need some humor sometimes when investing.

  • Report this Comment On June 29, 2010, at 8:49 PM, cupocoffee wrote:

    flymikefly04 is absolutely right. This is a great way for a new investor to begin their portfolio and the costs are extremely low. I started investing this way 10+- years ago and always reinvested my dividends. Sometimes I could buy more stock with $150 or $200 but there were times I sent much less. It requires patience but it all adds up and it is very gratifiying to build savings and have dividends increase....hopefully!

  • Report this Comment On June 29, 2010, at 9:55 PM, BearishKW wrote:

    to Youngdude and all the other fellow small fries like myself:

    I'm 27 and have been fortunate enough to stay gainfully employed since graduating, and contributing toward a Roth IRA enough to build up a down payment for a home.

    I cannot stress how happy I have been with the Roth IRA. Sure it took a hit with the big downturn, but I kept everything in and rode it back up to where it is now. When I went to remove the funds (through Fidelity Investments) from my IRA, all it took was a call, and as a first time homebuyer, there is no 10% penalty. Sure real estate may keep going down for the near future, but interest rates are at an all time low and I am using the mantra of buy low/sell high.

    I've kept the IRA open, and will start buying the market again at the soonest opportunity.

    It's America afterall... stay long and be thankful that, at this stage in your life, you're part of the investing class. Don't buy a motorcycle and give to charity once in a while too.

  • Report this Comment On June 29, 2010, at 11:30 PM, scubadver wrote:

    I would advise looking around to your banking institutions and to do a combination of investing. Look at which investing service offers the best in terms of research tools and the like, and buy a few shares through them, making the minimum necessary trades in order to continue using their service. Then look at a place like BOA investing where with a certain minimum balance you have a set number of free trades per month. This will allow you to do essentially a controlled drip with out the fees of a Sharebuilder. In addition I would advise ETF's above mutual funds at the moment. Lower fees while maintaining the diversity that a mutual fund offers. And of course max out your 401k and IRA investments every year. Tax hurts.

  • Report this Comment On June 29, 2010, at 11:42 PM, NudeTypist wrote:

    Perfect timing with this article! I've been looking into investing for a while now and was about to make the move. Here's my picks for start up:

    -Proctor & Gamble for stability and long term dividends

    -Bank of America because I think it has potential to rebound.

    -Activision/Blizzard because it seems under valued.

    -Hasbro because it's steadily climbing for so long and runs a good business.

    Any opinions on my picks would be helpful. Thanks!

  • Report this Comment On June 30, 2010, at 9:39 AM, YoungDude20 wrote:

    Anyone have the best online broker for automatic investments? I am looking to invest $50-$100/month in stocks but want to have the lowest commissions/fees.

  • Report this Comment On June 30, 2010, at 11:03 AM, gddunton wrote:

    For multiple individual stocks, Sharebuilder is a great low cost way to invest. They have low monthly fee programs that allow you to diversify your investments.

    Another option is to build your portfolio with ETFs until you get a larger balance to work with. Also having a solid foundation in low cost ETFs is a one great way to get into the market. I have my Roth IRA in Schwab because they offer $0 commission trades on their ETFs which have some of the lowest expenses on the market (broad market = .06%).

    I believe Vanguard is also offering similar pricing/ expenses on their products through their brokerage.

    Lastly if you are happy with 1 or 2 select companies check and see if they have Dividend Re-Investment Programs (DRIP) programs. Most offer low monthly minimums and no fees until you sell. Its similar to that Computershare link above, but you deal direct with the company or their DRIP agent.

    Here is the link to J&Js:

    http://www.pg.com/en_US/investors/investing_in_pg/sip.shtml

    And Conoco Phillips

    https://isd.bnymellon.com/isd/faces/jsp/enroll/investmentPro...

    PS: Make sure you check into the tax implications with Dividends held outside tax deferred accounts.

  • Report this Comment On June 30, 2010, at 12:50 PM, starz188 wrote:

    YoungDude20 - If you're looking for cheap automatic investments, I would recommend you look into Sharebuilder. I personally invest there, and I the rate right now for an auto-investment is $4.

    As far as picking stocks - start with companies you already know you and use. You're young enough to invest aggressively, and you should, but just starting out it's wise to pick companies you're familiar with.

    Later, if you find yourself more comfortable tackling financial reports and all the acronyms used in the Fool article start making sense, you can look into investing in small caps and getting more aggressive.

    Try finding a mid-large cap company that has paid a steady dividend over the years. Johnson & Johnson is a fine example (I don't personally own stock in J&J). Make sure you set it up so your dividends will auto-reinvest into the company - it's very easy to do on Sharebuilder.

    Other than that, if you're serious about investing, read and research! You're already on the Fool, so that's a great start!

  • Report this Comment On June 30, 2010, at 1:30 PM, YoungDude20 wrote:

    Computershare has auto-invests at $2 + $0.03/share. What benefit does Sharebuilder have over this?

  • Report this Comment On June 30, 2010, at 2:21 PM, TMFNato wrote:

    @YoungDude You mention you're looking for dividend stocks. If you don't already have one, a Roth IRA would be a great place to stash any big dividend payers you find, provided you plan to hold them for the _really_ long term. As long as you won't need the money you're investing until you reach retirement, a Roth IRA can not only protect you from having to pay taxes on your dividends every year, but it should also free you from worrying about calculating the cost basis of shares purchased with reinvested dividends (since you'll be withdrawing the proceeds tax-free).

    Also, I just wanted to thank all the folks who've provided such amazing advice here in the comments. You Fools rock. (:

  • Report this Comment On July 01, 2010, at 2:25 PM, MattSEMO08 wrote:

    Does anyone have any opinion about investing in CEF?

  • Report this Comment On July 02, 2010, at 8:37 PM, warrenrial wrote:

    You people need to go back to school.

  • Report this Comment On July 06, 2010, at 12:58 AM, djshagggyd wrote:

    Youngdude-

    You should post blogs on your TMF profile if you have any other questions in the future. There are tons of friendly people on Fool who are willing to help newbies like us.

    MattSEMO08-

    I like CEF and was thinking of adding it to my IRA later this month. But I'm a novice... so don't take my opinion too seriously! Best of luck!

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