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. Let's quickly take a look at the advantages young investors can harness. Then we'll dive into one simple method for constructing a stock portfolio.
Ah, to be young
Here are a few remarkable advantages you have when starting early.
- You have time on your side, which gives you wiggle room if you make some mistakes.
- Being young allows you to invest more aggressively than many investors.
- Investing small amounts of money now will give you significant advantages later in life.
And if those reasons aren't enticing enough, consider the following: 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 already!
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 extraordinarily high, consider stomaching 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 you with steady growth, and are considered blue-ribbon companies in their respective sectors. They tend to be the stocks of big, tried-and-true companies that have been around for many decades. These companies are sometimes considered boring, but you can sleep well at night knowing they'll be around tomorrow. In fact, you may likely own some of these same core stocks for the rest of your life.
Core stocks often pay a hefty dividend, which is basically a bonus for being a shareholder. When you're young and don't need income because you receive wages from your job, reinvest these dividends. Each time you do, you'll buy more shares of the company.
We often use these companies' products and services on a daily basis. For example, think about where you bank or what type of toothpaste you like. There's a good chance that the companies behind those are considered core.
For example, Wells Fargo (NYSE:WFC) and Procter & Gamble (NYSE:PG) are two core stocks you'll want to consider. Founded in 1852, San Francisco-based Wells Fargo is one of the nation's biggest banks and its largest home-lender. The company will likely soon gain approval to raise its already enticing 2.7% dividend yield. Meanwhile, consumer goods giant P&G boasts 25 products that each generate more than $1 billion in sales annually. P&G pays nearly a 3% dividend yield and has raised its dividend for 56 consecutive years.
Growth stocks aren't as stodgy as core stocks, but they aren't as sexy as 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 part of your portfolio, consider eBay (NASDAQ:EBAY) and Chipotle (NYSE:CMG). eBay's reinvented Marketplaces business is outpacing global e-commerce growth. And its PayPal business, a pioneering leader in next-generation payments, is poised for growth as the industry evolves.
Chipotle boasts a proven business model of providing yummy, high-quality fast food. Despite the burrito maker's fiery success, its growth story isn't over. Chipotle enjoys excellent international growth opportunities, and its ShopHouse Southeast Asian restaurant concept (with only one location currently) has huge potential.
These companies have the potential to trigger paradigm shifts, turning an industry completely on its head. Think of the small-cap biotech company that might create a therapy to cure cancer. Or 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. For example, last year's stock market darling 3D Systems (NYSE:DDD) returned a whopping 247%! And that might be just the beginning if this exciting technology is widely adopted.
You tend to either hit it big or miss miserably with these stocks, so consider this your Vegas money. Just don't invest so much in aggressive stocks that you'll be heartbroken or destitute if you lose it all.
Foolish bottom line
By starting at a young age, you'll not only build a great stock portfolio, but also learn a lot 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!