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 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 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."
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.
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!