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How Young Investors Can Get Richer

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The market meltdown in 2008 and 2009 threw just about everyone for a loop. Yet even though it may have had the largest financial impact on those close to retirement who already had large investment portfolios, you may see the more lasting effects among young investors and the change in behavior that the Lost Decade has encouraged.

Lining up the X's and Y's
A recent survey from MFS Investment Management took a look at how members of Generation X and Y -- those who were born after the baby boom ended in 1965 -- have changed over time, as well as comparing them with the attitudes of baby boomers on the same financial topics. The results reveal a group of investors dealing with conflicting opinions about investing generally.

On one hand, young investors have started taking greater steps toward ensuring their long-term financial independence. Among those who answered the survey, 42% say they've contributed more to retirement accounts over the past 12 months, up from just 30% in last year's survey. Nearly half have set aside concerns that they would never feel comfortable owning stocks. Moreover, they're outpacing their older counterparts by setting more aside in nonretirement accounts and taking on additional risk, and a majority of them recognize that they need substantial exposure to international investments in order to have a truly diversified portfolio.

Yet behind these good deeds are a number of concerns. Despite their longer time horizon, young investors still have a smaller percentage of their money invested in stocks than older investors, with a huge 30% cash cushion. They fear inflation but haven't taken steps to fight it, and the huge amount of new investment options has them scurrying for financial advice from all quarters.

Investing made easy
Young investors who are just starting out certainly haven't gotten a very nice introduction to the stock market. With all the uncertainty in the economy and with geopolitical events always looming, even experienced investors have found the ride bumpier than they'd like.

But as scary as stocks may look, keeping huge portions of your money in cash earning next to nothing isn't a good long-term answer. If you have a definitive plan on what to do with that money -- waiting for pricey stocks to come down to more reasonable valuations, for example -- then that's fine. But I suspect that most young investors are keeping cash levels high just because they don't know what else to do.

For that fear, I have two simple solutions. One is to dollar-cost average into the market with broad market ETFs. With a combination of Vanguard Total Stock Market ETF to cover U.S. stocks and iShares MSCI EAFE ETF and Vanguard MSCI Emerging Markets ETF (NYSE: VWO  ) to give you international exposure, it's easy to get started with an ETF-based stock portfolio.

Another solution is to focus on conservative, low-volatility stocks. A quick screen for companies that combine high dividend yields, attractive valuations, and low beta values included the following stocks:


Dividend Yield

Current P/E

3-Year Beta

Altria (NYSE: MO  ) 5.7% 14.4 0.46
Campbell Soup 3.4% 14.5 0.25
ExxonMobil (NYSE: XOM  ) 2.1% 13.4 0.43
General Mills (NYSE: GIS  ) 3.0% 14.7 0.19
Kimberly-Clark (NYSE: KMB  ) 4.3% 14.7 0.40
Teva Pharmaceutical (Nasdaq: TEVA  ) 1.7% 13.6 0.20
Xcel Energy (NYSE: XEL  ) 4.3% 14.7 0.39

Source: Motley Fool CAPS.

With regular dividends and relatively cheap share prices, these stocks give you some protection against whatever the next piece of bad news might be for the financial markets. These stocks don't guarantee a smooth ride going forward, but they're reasonable candidates to get familiar with individual stocks and the way they behave.

No one said it would be easy
For most young people, investing success doesn't come naturally. You have to work and get familiar with investments before you can expect to master them. But with some courage, you can get out of the cash trap that many young investors have fallen into and instead make sure your money is working hard enough for you to give you the prospects for the more prosperous future that you deserve.

And to keep your eye on those seven stocks, track them using the Fool's My Watchlist service by clicking here. You'll get valuable updates as well as immediate access to a new special report, "6 Stocks to Watch from David and Tom Gardner." Click here to get started.

Fool contributor Dan Caplinger always tries to keep things easy. He owns shares of the Ishares MSCI EAFE and Vanguard MSCI Emerging Markets ETFs. Kimberly-Clark is a Motley Fool Income Investor recommendation. The Fool owns shares of Altria Group, ExxonMobil, Teva Pharmaceutical Industries, and Vanguard MSCI Emerging Markets ETF. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy will never get old.

Read/Post Comments (4) | Recommend This Article (25)

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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 April 30, 2011, at 10:22 PM, rfmjbs wrote:

    For some of us, 30% of our net worth IS our 6 to 12 month emergency fund sitting in either laddered CDs or money market account or money market fund if we're especially daring. With the current job market there's a very real fear of having both family wage earners laid off - cash is king for the next 18 months.

    It sucks but yeah we think we're stuck with a lot of cash on hand in case of emergency.

    Most of my similarly situated coworkers -mid 30s-are $60K in retirement assets (ira/401k), $60K in the emergency fund, $60K in home equity, and a tiny but growing amount in taxable investments and an average of $10K saved for kids private school tuition for next school year.

  • Report this Comment On April 30, 2011, at 11:46 PM, AvianFlu wrote:

    I certainly hope that your cash on hand is in currencies other than the US dollar, since the idea is to NOT have your purchasing power drop over time.

  • Report this Comment On May 01, 2011, at 12:14 AM, SeanFlynn1 wrote:

    Wow, rfmjbs, you're sitting on nearly $200k in your mid-30s and you're worried? Try switching to decaf!

  • Report this Comment On May 05, 2011, at 1:32 PM, akandrew wrote:

    I tend to believe that my cohort of sub-30 friends are “normal” or “average”, but I may have to reexamine this thought. We had boy’s night out a few weeks ago and when talk turned to investing the ideas that were thrown out were LuluLemon, PriceSmart, Capstone Turbine and buying Iraqi dinar. I should also point out that must of the people I know have a soul and would never buy Exxon, although maybe that’s because we hail from the great state of AK. I think you are underestimating the general knowledge and level of capacity of “young investors”. Like a said, I think we are normal, but maybe we are not.

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