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Why Young Investors Should Love the Crash

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Most of the news you've heard over the past couple of weeks has focused on how cataclysmic the big sell-off in stocks has been. But one group of investors should hope that the market keeps on dropping -- and be ready to swoop in to take advantage of the huge bargains that would result.

Steering clear of stocks? Not so much
Ever since the market meltdown in 2008 and early 2009, financial planners have had concerns about young investors staying away from stocks. The idea was that like those who grew up in the aftermath of the Crash of 1929 and the Great Depression, young investors who had only known the market's lost decade of the 2000s would conclude that stocks were a losing bet and avoid them in favor of other investments.

But recent research suggests that the impact on investors under age 40 hasn't been as big as once thought. On one hand, data from the Investment Company Institute shows that only 35% of those born between 1970 and 1979 own stocks, down from 55% 10 years ago. Yet a closer look at 401(k) plans shows that average equity allocations in young workers' retirement accounts have jumped sharply -- from around 40% in 2003 to nearly 85% in 2010.

The report concludes that the reason for the shift has to do with investment options. In particular, 401(k) default choices that include target retirement funds tend to invest nearly all of their money in stocks for young workers, which is a big change from old defaults that put workers into cash investments.

The best stocks for young investors
As hard as it is to buy stocks after a market plunge, young investors should be salivating right now. For the first time in a while, individual stocks across the board are getting cheaper, giving you carte blanche to pick up shares of the companies that interest you the most at prices you haven't seen for a long time.

But if you don't know much about stocks, which ones should you pick? You can always go with a broad-market index mutual fund or ETF. But choosing individual stocks has a side benefit: You get a chance to invest up close, getting familiar with companies and learning about what makes one stock better than another.

In particular, young investors should consider stocks that fall into these categories:

  • Pick some stocks that will outlast you. With 30 to 40 years or more before retirement, you want some of your portfolio to include stocks that will be there when it's time to sell. You can expect to see continued growth throughout your lifetime from companies like Costco (Nasdaq: COST  ) and McDonald's (NYSE: MCD  ) , which have stood above their competitors over time.
  • Take some risks. On the other hand, with so much time, you can afford to invest aggressively. Google (Nasdaq: GOOG  ) dominates one tech niche but is branching out to others, with prospects for huge growth if it can succeed. Intuitive Surgical (Nasdaq: ISRG  ) is on the literal cutting edge of robotic surgery with its da Vinci systems. Both already have good histories, but each has much further to go if things continue to go well in their respective industries.
  • Use dividends to your advantage. Even as they're buying modest numbers of shares with their limited funds today, many young investors don't realize that reinvested dividends will eventually boost their holdings by many times. Especially with high-yielding stocks Annaly Capital (NYSE: NLY  ) , Terra Nitrogen (NYSE: TNH  ) , or even AT&T (NYSE: T  ) , putting your dividend payments back into buying new shares can help your portfolio multiply much more quickly over the years.

Finally, try to have some cash on hand to take advantage of situations like the one we're in today. Occasionally, market drops will give you a chance to buy in on stocks that were previously more expensive than you wanted to pay. With some cash on the side, you'll always be ready to take advantage.

You're never too young to get started
Fortunately, young investors are more resilient than some give them credit for. Even as others panic about falling stock prices, some young investors will turn this into the opportunity of a lifetime by taking the plunge and getting off to a great start on their investing careers. You can too.

Looking for a stock with big potential? Get this free special report from the Fool on the hottest IPO of 2011 and find out how you can cash in.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger isn't quite young enough to love the crash, but he's not too upset about it either. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Annaly Capital, Google, and Costco. Motley Fool newsletter services have recommended buying shares of Google, Costco, McDonald's, Intuitive Surgical, and AT&T. 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 never crashes.


Read/Post Comments (15) | Recommend This Article (37)

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 August 17, 2011, at 2:14 PM, jimmy4040 wrote:

    I am personally heavily invested at all times, short as well as long. However this:

    "For the first time in a while, individual stocks across the board are getting cheaper, giving you carte blanche to pick up shares of the companies that interest you the most at prices you haven't seen for a long time"

    is crazy talk.

    The S&P 500 has only dropped back to the levels of 9 months ago. There is nothing cheap about this market. Advising young people to be in the market is good advice. Deluding them into thinking that this particular market is underpriced is nonsense.

  • Report this Comment On August 17, 2011, at 3:58 PM, Gato337 wrote:

    The crash in 2008 did not discourage me from investing, rather it made me realize the importance of a thoughtfully planned portfolio maintained with a solid investment strategy. It seemed like people who relied on faceless brokers to handle their money were struck worst by the panic selling because they were quick to lose confidence in the investment decisions that they had allowed other people to make for them. During the crisis, my friend's mother turned on her broker, pulled everything out of the market at a huge loss, and has now sworn off investing in the stock market. As a result, she has very little to look forward to in when she retires in 15 years. A cautionary tale indeed.

    I started actively managing my own portfolio in January after my Dad sat me down and walked me through his Foolish investing philosophy. He encouraged me to start educating myself and to develop a long-term investment strategy. I was open to it because I see that starting young will give me a big advantage later in life (I am 23), not only though the wonder of compounding returns but also through gaining valuable experience. I began by reading through much of TMF's intro investing literature (13 steps, investopedia) and although Im not a subscriber to any of your pay services (yet), I do take advantage of the wealth of free information on this site, maintain a CAPS portfolio, and read TMF articles every day (not to mention participating in the live chats y'all hosted all last week, which were fun and informative!)

    Technology is what's really going to help young people get involved in investing, specifically: low-cost online brokers, social media, and online investing communities like TMF. Like most of my peers, at least half of my life is played out directly or indirectly through the internet, so such tools allowed me to integrate investing into my life very easily. If investing required me to maintain drawers full of hardcopy files of stock research and be on the phone with a broker all the time, I definitely would not have given it the time of day.

    Because I am so new to the game, it was really great to have such an involved and supportive community to go to when the market started going wild 3 weeks ago. I am happy to say that even with the madness of the last few weeks, my portfolio is still in the black and beating the S&P ( +4% since January), time will tell if I can hold that advantage through the end of the year.

    Thanks TMF! Stay Foolish!

    -Caitlin

  • Report this Comment On August 17, 2011, at 4:11 PM, Bobjitsu wrote:

    Im 42 and about to have my first kid. Im going to put $100 a month into McD's until he or she is 18....wish my parents had done that for me

  • Report this Comment On August 17, 2011, at 4:17 PM, jimmy4040 wrote:

    bob:

    Waiting until you were 42 to have your first was probably the best investment decision you ever made. Consider making an oil related choice for your second purchase. There are no scenarios short of a Depression where a quality oil investment won't be worth substantially more in 10-20 years than now.

  • Report this Comment On August 17, 2011, at 4:18 PM, jimmy4040 wrote:

    Caitlin:

    congratulations.

  • Report this Comment On August 17, 2011, at 4:20 PM, catoismymotor wrote:

    Caitlin, in you I see a formidable Fool. Keep up the great work.

    Bob, I'm doing something similar for my two young ones. I just started as well.

  • Report this Comment On August 18, 2011, at 1:28 AM, TimothyVR wrote:

    It's an exceptionally good time to buy the dividend aristos - many of which are indeed underpriced.

    However, I do have a question: The drop from 55% to 35% is a stunning drop. But that would mean that 55% of people in their 20s owned stock in 2000. That seems a bit high for that young a group (born between 1970-1979)

  • Report this Comment On August 18, 2011, at 1:31 AM, TheNoobInvestor wrote:

    I'm right there with you buddy. I'm quite the Noob Investor, but I fully agree with you. Especially if you're just hopping in over the past two years or so. Great article.

  • Report this Comment On August 18, 2011, at 2:28 AM, minimumwage wrote:

    Yay! Go new investors!

    But lol about inferring that "young" investors are those under 40. As a 23 year old, that seems ancient. :)

  • Report this Comment On August 18, 2011, at 9:48 AM, jimmy4040 wrote:

    It's not a good time to buy anything, UNTIL we get some clarity on the eurozone. Just because they're down 10% doesn't mean they can't fall another 10%.

  • Report this Comment On August 18, 2011, at 11:44 AM, kerckhoff wrote:

    Although I'm not young, except at heart, I have never invested...how do I get started?

  • Report this Comment On August 19, 2011, at 1:35 PM, masterN17 wrote:

    It's about time the young started benefiting from all these boomer-generated disasters...

    Do it for the children!

  • Report this Comment On August 19, 2011, at 9:50 PM, skypilot2005 wrote:

    If you are young, less than age 35.

    Put a regular amount or % in the market each pay period or month.

    Don't have the time or interest to research individual stocks.

    The S&P 500 may be a good choice for you. Ticker symbol SPY. Just "set it and forget it".

    Start watching it closely at age 55.

    Sky Pilot

  • Report this Comment On August 20, 2011, at 10:18 AM, patternpro wrote:

    drw is another good choice for a college fund. home prices have been hammered, and even if they fall a little more this etf will pay u around 10%/yr to wait around. When things pick back up down the road u will also get a big pop in the share price.

  • Report this Comment On August 21, 2011, at 7:34 AM, TMFGalagan wrote:

    @TimothyVR - The survey was looking at people who owned *any* stocks or stock mutual funds. So even having a few hundred bucks in an index fund at a 401(k) somewhere would have qualified. That would explain the 55% number.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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