1 Stock Portfolio for Young Investors

Young people have great intentions when setting out to invest for the first time. But combing through the stock universe without a plan can feel overwhelming. Here are the advantages young investors harness and one simple method for constructing a stock portfolio.

Time is on your side
You have three remarkable advantages for starting investing early. First, you have time on your side, so you can afford to make the occasional mistake. Second, you can invest more aggressively than many investors. Third, investing small amounts of money now will give you significant advantages later in life due to the magic of compound interest. Those three reasons alone are enticing enough to get started!

Building your portfolio
You can construct a great portfolio using a simple method and several high-quality stocks. Allocate a portion of your portfolio in core stocks, a piece in growth stocks, and a sliver in aggressive stocks. If your risk tolerance is high, include an extra stock or two in the growth and aggressive piles. On the other hand, if your risk tolerance is low, add more core stocks and fewer aggressive ones.

Core
Core stocks build the foundation for your portfolio, provide steady growth, pay hefty dividends, and are considered leading companies in their respective sectors. We often use these companies' products and services on a daily basis. They tend to be stocks of big, tried-and-true companies that have been around for many decades. They're often considered boring, but you can sleep well at night knowing they'll be around tomorrow. In fact, you may own some of these same core stocks for the rest of your life.

Procter & Gamble (NYSE: PG  ) is a core stock you'll want to consider. The household goods giant boasts 25 brands each bringing in more than $1 billion in annual sales. P&G has been paying its current 3.1% dividend for 123 consecutive years and has increased its dividend for 57 straight years. Despite recent management changes, the company continually delivers innovation consumers have come to expect. Its Tide brand, including Tide Pods, has been deemed a Pacesetter industry benchmark new product award every year since 2005. P&G's been criticized for being late to enter emerging nations. But its presence in faster-growing international markets is increasing, with about 40% of sales now coming from developing markets.

Growth
Growth stocks aren't as stodgy as core stocks, but they aren't as sexy as the aggressive ones. These middle-of-the-road stocks still have excellent growth potential and boast well-established business models. Some of these stocks pay a small dividend, but others don't pay one at all.

For this portion of your portfolio, consider Chipotle Mexican Grill (NYSE: CMG  ) . Chipotle boasts a proven business model of providing yummy, high-quality fast food. In 2012, Chipotle grew revenues 20.3% and saw same-store sales growth of 7.1%. Despite the burrito maker's fiery success, its growth story isn't over. With fewer than than two dozen locations in Europe and Canada currently, Chipotle has huge overseas growth opportunities. Chipotle's ShopHouse and Pizzeria Locale restaurant concepts also house huge potential. These restaurants have only a few locations right now, signifying lots of room to grow. Co-CEO Steve Ells feels Chipotle is "ready to expand at a faster rate" since the company "knows exactly what regions, what markets, and what intersections we would want to go to with these new concepts." 

Aggressive
These companies have the potential to trigger paradigm shifts, turning an industry completely on its head. Consider today's hot 3-D printing sector, spurred by a disruptive technology that's reshaping the way the world converts data into physical objects. The most diversified player in the industry is 3D Systems (NYSE: DDD  ) . Industrial companies initially adopted the technology, but the printers are becoming more affordable for home and office use. 3D Systems released The Cube, a 3-D printer that costs $1,300. But this razors-and-blades company makes its money off the consumable ink cartridges. 3D Systems returned a whopping 406% over the past two years, but that might be just the beginning if this exciting technology is widely adopted.

You likely either hit it big or miss miserably with these stocks, so consider this your Vegas money. Don't invest so much in aggressive stocks that you'll be heartbroken or destitute if you lose it all.

Foolish takeaway
By starting at a young age, you'll not only build a great stock portfolio but also learn much about investing -- and yourself. It's natural to make some poor choices along the way. But being a good investor requires lifelong learning. So don't beat yourself up over the mistakes. Just learn from them and Fool on!

The next step for you
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Read/Post Comments (11) | Recommend This Article (16)

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 March 04, 2014, at 7:22 PM, mike48025 wrote:

    I think this astute article gives some excellent advice AND brilliant buying recommendations to young people. I started saving for my retirement 40 years ago - but I lost most of my expected retirement savings in the 2006-2008 real estate & stock market debacles. Unfortunately at the time I was also a 66 year old real estate agent in Detroit, MI working strictly on commission - so I also lost my income, and went into economically forced retirement. The thing that saved me was that 20 years ago I accidently invested modestly in about 10 "forever" high dividend paying stocks (e.g. P&G, JNJ, DET, CVX, etc.). I say 'accidently' because nobody ever told me to do it & I just thought it sounded like a good idea. I re-invested all the dividends (for 20+ years) - and now it gives me access to a great cash flow supplement to my Soc Sec.

    So the Rx to young, starting out investors to invest 1/3 in a great core 'forever' stock with high dividends is astute. My core stocks saved my retirement. But the other 2 Rx's are equally astute & important.

    What a great introduction and early education in the necessary diversification & growth components of a good portfolio. And what more appropriate choices for young people than 2 companies that are (or will be) part of their daily lives for some time. Something they can relate to. For those smart enough to take the advice in this article - it should give you great rewards, AND a great education in investing.

    Happily retired in the Caribbean :-)

  • Report this Comment On March 05, 2014, at 2:56 PM, uddahbay wrote:

    As a 23 year old investor I think this article is great. It has solid advice and will be helpful to a young investor.

    However, I disagree with the recommended growth stock. While I think Chipolte is a great company and will have future success, I don't think buying a $600 stock with no dividend is a great growth opportunity for young investors. Young investors generally will have less to invest initially and I would much rather see that $600 dollars invested in P&G with a great dividend and a great track record as a company. Another alternative I would suggest is SBUX (still huge growth potential with the added benefit of a small dividend).

    In the end great article for the beginning investor.

  • Report this Comment On March 06, 2014, at 11:19 AM, terradistas wrote:

    I want to start off by saying that, as a 24 year old investor, I really appreciate having articles like this to learn from. My only recommendation is to recommend parameters for each stock type. All this article is telling me is that DDD is an aggressive stock, not how I would be able to find other aggressive stocks on my own. If you could mention some generally accepted parameters, I think that would be incredibly helpful as an addition to the specific examples you gave.

    That being said, thank you very much for the advice!

  • Report this Comment On March 06, 2014, at 11:31 AM, roger142 wrote:

    What a stupid article! Beginning (young) investors should not even be buying individual stocks! They should be buying mutual funds starting with a 500 index fund, then maybe a growth and income fund, then maybe a small cap index fund.

    Buying individual stocks means having to keep up with them every day, and being prepared to sell them immediately if they head south too quickly.

    Stocks like AT&T, K-mart, Sears, Global Crossing, Enron, Lucent Tech used to be considered blue chip investments, and a lot of investors lost a lot of money with them.

    Maybe once a young investor has $100k invested in their retirement accounts and a good understanding of buying individual stocks, then if they want to gamble 5 or 10k on individual stocks, OK. But not until they have established low cost mutual fund investments first.

  • Report this Comment On March 06, 2014, at 3:46 PM, somethingnew wrote:

    I like the candidness of this article. Nice read.

  • Report this Comment On March 06, 2014, at 7:29 PM, atarheelfool wrote:

    I'm sorry but how many young investors can afford to purchase a $600 stock? That's basically a weeks pay for many. However, I do agree with the core principle of the article.

  • Report this Comment On March 07, 2014, at 2:01 AM, SuntanIronMan wrote:

    @atarheelfool

    $600 itself is probably too small of a amount to purchase stocks. If you are purchasing stocks in dollar increments that small, you are going to get eaten up by broker commissions (even with discount brokers).

    The minimum anybody should be investing in a single commission-trade should probably be somewhere around $2,000. At least that was my self-imposed minimum amount when I first starting investing after college. That's a decent enough amount where the commission isn't a large percent of the entire value.

    As for how young investors get $2,000 worth of funds to invest in individual stocks, the same way everybody else does. By waiting until you have enough saved up. It wasn't too long ago that I was just opening up my first brokerage account. I remember those days very well.

    @roger142

    While I see the wisdom in investing in index funds, it is when you are young that you can most afford to take risk. Youth brings with it the luxury of time. If you make a bad investment in your youth, you still have decades of your working life correct for it. Whereas if you make bad investments later on in life, you might have enough time to fix your mistake.

    Of course individual stock investing is not for everyone. But if individual stock investing is for any one group of people in general, I'd argue that it is for young people.

  • Report this Comment On March 07, 2014, at 2:02 AM, SuntanIronMan wrote:

    Typo in my above comment:

    *Whereas if you make bad investments later on in life, you might NOT have enough time to fix your mistake.

  • Report this Comment On March 07, 2014, at 8:51 AM, henrobrice wrote:

    Good ideas for young investors- what would you say to 25 year-old me last year who invested in an mREIT and lost 35%?

    I think stock picking should involve businesses that are readily understandable and necessary for the economy to function.

    I wouldn't invest in Chipotle though- once everyone talks about a stock, the money may likely have been made.

  • Report this Comment On March 07, 2014, at 4:39 PM, bigdavred wrote:

    @ henrobrice

    25 years old...I'd tell you to buy more on that dip and keep raking in those tasty dividends for the next 40 years

  • Report this Comment On June 26, 2014, at 9:55 PM, thidmark wrote:

    "Buying individual stocks means having to keep up with them every day, and being prepared to sell them immediately if they head south too quickly."

    Nonsense. If you're doing this, you're doing it wrong.

    You can trade for as low as $4.95. That's half a percent on a $1,000 purchase. Not a lot at all, especially for a minimum 3-5-year holding period.

    If you stick with Dividend Achievers, you won't have to worry about getting Enron-ed.

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