Three out of five Americans in their 30s are at risk of experiencing a decline in their standard of living after they retire. But despite this dire statistic, your retirement preparedness doesn't have to be hopeless. Constructing a great retirement portfolio is actually quite simple.
Getting a head start
Young investors harness the single most desirable trait in the entire investing universe: time. With time on your side, you have wiggle room to make up for any investing mistakes. Also, being young allows you to invest more aggressively than many investors. And investing small amounts of money now will give you significant advantages later in life.
If those reasons aren't enticing enough, consider that between 1926 and 2010, there was not one single rolling 20-year period with negative returns for stocks. Not one.
So let's 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 exceptionally high, consider stomaching an extra stock or two in the growth and aggressive piles. Instead, if your risk tolerance is low, add more core stocks and fewer aggressive ones.
Core stocks build the foundation for your portfolio and provide you with slow but steady growth. They're stocks of big companies that have been around for many decades and are considered industry leaders in their respective sectors. Core stocks are often considered boring, but you can sleep soundly knowing they'll be around tomorrow. In fact, you'll probably own your core stocks for the rest of your life.
We often use these companies' products and services on a daily basis. For example, think about your favorite soft drink, the type of toothpaste you like, or where you bank. There's a good chance that the companies behind those products are considered core. For example, Coca-Cola (NYSE: KO) is a core stock you'll want to consider. As the world's largest beverage company, Coke boasts 16 billion-dollar brands -- including Diet Coke, Coca-Cola Zero, and Sprite -- and sells 1.8 billion servings of its beverages every single day.
Growth stocks aren't as stodgy as core stocks, but they aren't as sexy as aggressive. These stocks still have excellent growth potential and boast well-established business models. For example, consider a growth stock like Chipotle Mexican Grill (NYSE: CMG). Chipotle boasts a proven business model of providing yummy, high-quality fast food. This burrito maker has enjoyed sizzling success, but its growth story isn't over. Recently found to be the No. 1 fast-food restaurant choice among health-conscious consumers, Chipotle boasts vast growth opportunities internationally, and its Southeast Asian restaurant concept houses huge potential.
These companies potentially cause paradigm shifts, turning an industry totally on its head. Think of the small biotech company that might come up with a cure for cancer. Or consider today's red-hot 3-D printing sector, spurred by a disruptive technology that's reshaping the way the world converts data into physical objects. For example, last year's stock market darling, 3D Systems (NYSE: DDD), returned nearly 248% in 2012! And that might be just the beginning if this exciting technology is adopted widespread.
Caution: These are swing-for-the-fences stocks. You probably will either hit a home run or strike out miserably. Be sure not to invest so much money in aggressive stocks that you'll be broke and inconsolable if you swing and miss.
By starting at a young age, you'll not only build a great stock portfolio but also set yourself up for a fruitful retirement.
Your financial health is just as important as your personal health. The Motley Fool's special free report "3 Stocks That Will Help You Retire Rich" names specific investment opportunities that could help you build long-term wealth and help you retire well. The Fool also outlines critical wealth-building strategies that every investor should know. Click here to keep reading.