Young investors have tons of advantages going for them. For one, they have time on their side, which allows them to invest more aggressively and gives them some wiggle room in case they make mistakes. But figuring out how to invest in the stock market and sifting through the universe of investing options can feel like looking for a needle in a haystack. Here's a guide for making that process much easier.
Constructing your portfolio
You can build a great portfolio using a simple method and several high-quality stocks. The goal is to allocate portions of your portfolio to core stocks, growth stocks, and aggressive stocks. If you can stomach a lot of risk, include an extra stock or two in growth and aggressive holdings. On the other hand, if your risk tolerance is low, load up on more core stocks and fewer aggressive ones.
Just as the foundations of our homes provide stability, core stocks form the bedrock of your portfolio. They provide steady growth and pay consistent dividends. The companies behind these stocks are leaders in their respective sectors and have been in business for many decades. We often use their products and services daily. Core stocks often get knocked for being boring and slow-growing, but they're your sleep-well-at-night stocks. It's possible you'll own some of these stocks for the rest of your life!
Coca-Cola (NYSE:KO) is a core stock to consider. The soft-drink giant boasts 17 brands that bring in more than $1 billion in annual sales each. Coke's dividend recently yielded 3%. The cola maker has paid a dividend since 1920 and has increased its dividend for 50 straight years. Not only is it ranked No. 6 on this year's BrandZ Most Valuable Global Brand list, but five of the top 15 soft drinks are Coca-Cola offerings. The company has innovated and formed strategic partnerships in an effort to grow sales amid the continuous decline in U.S. soda consumption,. Coke has beefed up its noncarbonated beverage portfolio, as these drinks are expected to outpace carbonated drinks. As a result, Coke has added noncarbonated drinks to its lineup in recent years, including Honest Tea and ZICO coconut water, which were acquired in 2011 and 2013, respectively. Coke is also hoping its partnership with Keuring Green Mountain (UNKNOWN:GMCR.DL) will boost sales; Coke will produce single-serve drink pods for the Keurig Cold at-home beverage system.
Growth stocks aren't as stodgy as core stocks, but they aren't as flashy as aggressive stocks. These middle-of-the-road stocks still have excellent growth potential and possess well-established business models. Some of these stocks pay modest dividends, but others don't pay one at all.
For this portion of your portfolio, consider Whole Foods Market (NASDAQ:WFM). Organic food sales in the U.S. have skyrocketed, growing 16.5% annually (versus conventional food sales' 3.3% annual growth) from 1998 to 2010. Although the organic food market is expected to grow 14% annually over the next five years, it accounts for less than 4% of today's U.S. food sales. Those numbers alone indicate that Whole Foods has a lot of opportunities on the horizon. Now boasting $13 billion in annual sales with a presence in three countries, it plans to accelerate store openings. One strong impetus for doing so: Whole Foods' comparable stores open less than two years have produced an average 15% return on invested capital over the last eight quarters. The organic grocer posted slowing sales last quarter, with same-store sales increasing 4.5% compared to 6.9% growth in the year-ago quarter. That news has driven its stock down more than 20% since the May 6 announcement. But Whole Foods remains a great company with committed leadership, a fantastic brand, and healthy margins. Many investors, including me, view the recent sell-off as a mouthwatering opportunity to get into the stock.
Aggressive companies have the potential to trigger paradigm shifts, turning an industry completely on its head. Consider today's electric-vehicle industry, spurred by a disruptive technology that's reshaping the way the world thinks about road-tripping from Connecticut to California.
Tesla's (NASDAQ:TSLA) stock returned a whopping 634% over the past two years, but that may be just the beginning for this Silicon Valley-based electric-auto maker. The company turned a profit for the first time in 2013, a feat that CEO Elon Musk aimed to achieve that year. Tesla unveiled its highly anticipated Model X crossover at the Detroit Auto Show in 2012, and deliveries began on the carmaker's Model S premium sedan that same year. Hoping to lure affluent Chinese consumers, Tesla recently launched the Model S in China. Tesla has vastly expanded its Supercharger network of electric-car recharging stations across the U.S. Converting solar energy to electricity, the stations allow Tesla customers to charge their cars for free. In fact, Tesla plans to have charging stations within driving distance of 98% of the U.S. population by the end of next year! The interconnected system of stations now makes it possible to cruise in your Tesla from coast to coast.
With aggressive stocks you may win big or lose it all, so consider this your Vegas money. Don't invest so much in aggressive stocks that you'll be broke or inconsolable if you lose your investment.
By starting to invest at a young age, you'll build a great stock portfolio and also learn a lot about investing -- and yourself. It's natural to make some poor choices along the way -- it happens to the best of us! But learning how to invest in the stock market and being a good investor requires lifelong learning. So don't beat yourself up over the mistakes; just learn from them and move on.