In investing, younger investors have one big advantage: time. Not only can they let their investment gains compound longer, but they can afford to take on a little more risk than older investors. They have the time to ride out the market's ups and downs, and they also have more time to recover from losing investments.
A Roth IRA offers a great way for young investors to make the most of their time advantage. While contributions to Roth IRAs can't be written off on your current taxes, they grow and compound tax-free, and you don't have to pay taxes on any qualified withdrawals during retirement. Not only that, but you're free to withdraw your original contributions at any time without penalty, which makes them a great choice for young investors who aren't comfortable having their money tied up for decades.
With that in mind, here are three stocks that would make great additions to any young investor's Roth IRA.
One of the best one-two combos in the investing world is youth and a Roth IRA. That's because money invested in a Roth IRA by a young person can grow for a long time, resulting in a fat account at retirement.
That's why it's a smart strategy to fill your Roth IRA with stocks that have potential to be big long-term winners. One great candidate is Apple (NASDAQ:AAPL), which posted extremely impressive fourth-quarter results recently, with net income up 37% to $18 billion -- reportedly the most any company has ever earned in a quarter.
Apple's past stock performance would make anyone want to jump into a time machine and open a Roth IRA much earlier: Over the past 30 years, its stock has averaged an annual 20.3% gain. Of course, now that the company has reached gargantuan size, it's reasonable to assume that its growth will slow before long. But that's not happening yet, and the company still has growth catalysts on the horizon, such as further iPhone sales (especially in China), an iPad update, and the new Apple Watch. Further, the company has a track record of innovation, inventing whole new categories of products and then dominating them. It recently launched Apple Pay, and its App Store and Mac computer sales have been growing briskly. In short, the company has loads of potential.
The company also pays a dividend, which recently yielded 1.7%. And with $178 billion in cash, it can easily increase that payout. It can also acquire other companies, buy new and useful technologies, repurchase shares, and more. Young shareholders, who are likely to keep up with Apple's offerings, can make money from the company even while spending money on its wares.
One stock many young investors should be quite familiar with is Facebook (NASDAQ:FB). Despite its abominable performance out of the gate with its controversial initial public offering, the social-media giant has recovered nicely and produced solid returns for long-term investors who had the patience to wait through its initial declines.
Facebook's success has stemmed from its ability to adapt to changing conditions, moving almost seamlessly from desktop-oriented applications to the rising mobile platform. Now Facebook gets the majority of its revenue from mobile, even as older players in the industry have struggled to make that crucial transition. Facebook has drawn criticism for its willingness to spend heavily on acquisitions whose immediate value is far from obvious, but CEO Mark Zuckerberg's vision thus far has produced a strong internal corporate culture, an immense customer base of dedicated users, and seemingly limitless potential to expand its reach in whatever direction the company decides has the best prospects.
Choosing a high-growth stock such as Facebook is a great way for investors with a long time horizon to maximize the potential value of the Roth IRA's tax-free gains.
My favorite for young investors is Under Armour (NYSE:UAA). The athletic apparel and footwear maker isn't the dominant player in its industry in the way Facebook and Apple are in theirs. Under Armour's $2.8 billion in sales over the past 12 months amount to less than 6% of the combined sales of Nike (NYSE:NKE) and Adidas (OTC:ADDDF):
Why invest in the upstart instead of the behemoths? In short, it's the pure, unadulterated growth that up-and-comers can offer:
The entire industry is growing like wildfire, driven by increasing international demand. Under Armour might be one of the smallest players, but it has quickly established a reputation for innovative and high-quality products. A founder-led management team continues to invest heavily in product development -- especially in footwear -- as well as international expansion. These two areas will drive the business for years to come.
Case in point: Under Armour's footwear and international sales are only about one-third of sales today. Last quarter, footwear sales increased 50%, while international sales jumped 94%. This is the kind of company Roth IRAs were made for.