Face it: as an individual under 30, you're not the average investor, and modeling your portfolio after that of your parents isn't always a good idea. In fact, doing so can cause you to miss some valuable learning opportunities and could even cost you money in the long run. If you want to make the most of your money, every decision you make about your portfolio is as important as the last. In this article, we look at the unique set of challenges involved in portfolio management for young investors and provide some advice to help you succeed.

Picking Stocks
Obviously, picking the right stocks is one of the most important aspects of investing intelligently. However, as a young investor, you have a lot less to worry about - namely retirement and wealth maintenance. Because preserving your nest egg has yet to be your first priority (you have plenty of years ahead of you for that), you can take on a greater amount of risk than your parents can.

High risk certainly has some negative connotations, especially when you're talking about your money. Nevertheless, there are many advantages to dealing with riskier stocks. While higher risk investments do come with a greater chance of loss, they also come with a greater chance of gain. In other words, these stocks are subject to volatility. This is in contrast to more stable investments, such as those made in blue chip companies that generally have lower growth potential but also benefit from lower risk.

There is a wide range of riskier investments in the stock market, including small companies with high growth potential or companies in the midst of a turnaround. Taking a chance on one of these companies can greatly improve the returns you can earn in the market. However, don't forget that high-risk stocks live up to their name, so you stand the chance of losing the money that you invested. If you do, it's all right - virtually every investor suffers losses from time to time - chalk it up to experience and try again.

While higher risk investments have the potential for higher returns, there's a difference between a high-risk stock and a bad pick. An important thing to remember in this case is that a high-risk investment doesn't necessarily refer to a penny stock. Investing in penny stocks as an inexperienced investor isn't just very risky, it's very ill advised. It's best to leave that to people who know what they're doing.

Learning
Your portfolio isn't just for making money - at this stage in your life, it's also an educational tool. Believe it or not, a classroom isn't the best way to learn about the principles of investing. Learning by doing is often the most effective way to become a knowledgeable investor. When you make a decision about your portfolio, always think about what you're doing and look back on it when assessing your results. If you can make connections between your actions and your returns, you're more likely to replicate the good returns and avoid the bad ones.

Stepping into investing isn't easy. There's a learning curve involved in the stock market, and it's steeper for some than others. If you're having a hard time understanding the investing world, remember that it's not supposed to be easy - that's why the Wall Street wizards make the big bucks. There are resources around to help you, both online and in the real world. If something really has you stumped, ask your broker for help - it's part of his or her job to make sure that you understand what's happening to your money.

Though it may take you a while to get the hang of it, there are advantages to being a young investor. This generation is probably more financially savvy than the ones that preceded it. Having witnessed huge economic changes and trends, not to mention all of the investing education resources now available (online, in books and magazines, on TV), today's young investors have a substantial edge over their predecessors.

Getting Started
Eventually, you'll have to take the big step - actually buying a position in a company. When you finally make that investment, spend plenty of time thinking about what you're doing - don't just wing it. Think about a reasonable target price (this becomes easier to judge with experience) and understand what impact your investment budget has on your ability to make money. If you anticipate 10% returns, but spread your positions too thin, the return you'll need just to get past commissions could be close to or more than 10%. It's a lousy feeling to pick a good performer but not make any money on it because you didn't think about what the investment would cost you in terms of commissions and fees. Therefore, depending on how much money you have to invest, you might be in a better position to sink your entire investment budget into one stock than you would be to spread it thinly across several stocks.

When you have a stock that's performing the way you want it to, one of the potentially hardest things to do is get out. Selling a booming stock seems counterintuitive. After all, if it's still going up, why would you sell? When (and if) you reach that sought-after target price, it's time to reevaluate whether you should sell the stock. If the target price makes sense, it makes sense to sell. Group mentalities might suggest that holding on a little longer could bring another 20 cents per share, but invest with your mind, not with your gut - if a price is artificially inflated, then it's a lot more likely to fall hard. Trust your analysis.

It's unscientific to decide how well you're doing without developing some sort of criteria for success. If you decide that you want overall gains of 15%, it makes a lot of sense to sit down and evaluate exactly how well you did. If you fell short of your goals, ask yourself why. Did you make a mistake in picking your stocks? Did the market behave unexpectedly? Were your targeted gains unrealistic? If you don't go over your trades individually and as a whole, it's quite possible to have a skewed idea of just how well you're doing.

The Bottom Line
Being a young investor has its own set of challenges. If you think of your investment decisions as learning opportunities, even losses can be considered investments in your financial education. In the beginning, learning how to make money is more important than actually making it. So, to put a financial twist on an old saying, teach yourself to fish for the right stocks and you'll feed your bank account forever.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  4. Savings

    6 Ways to Save Money on College Supplies

    Tuition and room and board are big expenses, yes, but the cost of textbooks and supplies can add up, too, unless you strategize.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Low Volatility

    Find out about the PowerShares S&P 500 Low Volatility ETF, and learn detailed information about this fund that provides exposure to low-volatility stocks.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares US Real Estate

    Learn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Corp Bd

    Learn about the SPDR Barclays Short-Term Corporate Bond ETF, and explore detailed analysis of the exchange-traded fund tracking U.S. short-term corporate bonds.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Bond

    Find out about the Vanguard Intermediate-Term Bond ETF, and delve into detailed analysis of this fund that invests in investment-grade intermediate-term bonds.
  9. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  10. Forex Strategies

    How To Avoid Exchange Rate Risk

    What are the best strategies to avoid exchange rate risk when trading?
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Passive Income

    Earnings an individual derives from a rental property, limited ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  4. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  5. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  6. Good Student Discount

    An auto insurance policy discount available to young drivers ...
RELATED FAQS
  1. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  2. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  3. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. What percentage of a diversified portfolio should large cap stocks comprise?

    The percentage of a diversified investment portfolio that should consist of large-cap stocks depends on an individual investor's ... Read Full Answer >>
  6. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!