Young Investors Are Buying the Wrong Stocks

According to recent data by SigFig, stock portfolios of young people and older people tend to look very different. As you may expect, younger investors are willing to take more risk and prefer to invest in more cutting-edge companies, while older investors are more likely to invest in stable blue chips.

Source: WC user Gphgrd01.

And while it's fine to speculate a little bit, some of the stocks that young people consider "boring" are the very investments they should be taking advantage of, given that they have decades until retirement. A portfolio of solid, stable companies, combined with a long time horizon, is perhaps the most certain way to wealth in the stock market.

What young people are buying
The stocks that are popular with younger investors should come as no big surprise. To name a few, Tesla (TSLA 4.96%), Amazon.com (AMZN -1.65%), and Twitter (TWTR) are owned by investors with median ages of 35, 39, and 40, respectively.

This makes a lot of sense. After all, these companies make products that younger people use and see every day, and they think of themselves as being on the cutting edge of their respective industries.

The problem with stocks like these is that they can be risky and volatile and may not work out over the long run. Will people still be buying Tesla automobiles in 30 years? Will people still be using Twitter to connect with others? Maybe, maybe not. And these companies' share prices can fluctuate quite a bit. For example, over the past few years, Tesla has soared from about $25 to nearly $300, and it's back under $200 again after this writing -- definitely exciting, but very uncertain.

Having said that, these are all excellent companies, and there's nothing wrong with allocating a small percentage of your portfolio to stocks like these. In fact, I own shares of Twitter. However, the majority of your holdings should be companies that you know will be around in 20, 30, and even 50 years.

What they should be buying
Unfortunately, the kinds of stocks young people should buy are considered to be "boring" or "for old people" by many younger investors.

And it's completely understandable that they feel this way. After all, the median age of investors who hold shares of Johnson & Johnson (JNJ -1.15%), Procter & Gamble (PG -0.03%), and Chevron (CVX 1.04%) is 56 years old. Plus, these stocks rarely experience big moves, so they rarely make headlines.

Here are some other solid blue-chip companies favored by older investors.

Source: SigFig.

Not so boring after all
The problem with the "boring" perception of these stocks is that they are actually anything but. Sure, over any short-term period, these stocks are unlikely to thrill you with their performance. However, over the long run, these companies tend to produce consistent market-beating performance that might amaze you.

Over the past 20 years, Chevron has averaged a 13% total return per year, even after the recent decline in the oil sector, and Johnson & Johnson and Procter & Gamble have both averaged about 11.6%. All three of these handily beat the S&P's 9.5% average, and this performance can really make a difference over time in your portfolio.

As an example, if you had invested $10,000 in S&P 500 index funds 20 years ago, it would have grown to $53,000 today. Pretty good, right? On the other hand, if you had taken that $10,000 and split it between the three companies mentioned, it would be worth more than $98,000 today, assuming you reinvested all of your dividends. There's nothing boring about those gains!

It's OK to take risks, but be sensible
I'm not saying your entire portfolio should be made up of stocks like these, but my point is that they have more of a place in a young investor's portfolio than you might think. If you want to invest in the "next big thing," go for it, but keep it to a small portion of your portfolio.

Although these stocks may seem boring to you now, they won't in 20 or 30 years. Steady and predictable growth is the most certain path to wealth, so set your portfolio up for success while you have the time frame to take advantage of it.