Are high risk stocks still a good option for young investors?
I have been invested in stocks since I was 5 years old when my dad gave me $100 to invest. Now that I have been in the workforce for a few years, I have both a traditional IRA and collection of individual stocks. I am 24 now and I have always heard that for young investors it is okay to have around 70% of your portfolio in stocks. Given the fact that the market has become increasingly volatile, is it still reasonable to balance your portfolio this way when you have 40 years before retirement?
Stock volatility actually isn't greater than in the past, it's very much in line with history and by some measures we are not in as volatile of a period as most decades. In fact, volatility is good for long-term investors. The volatility of any individual stock can be great, which is why it is better to have stock ownership through mutual funds where you remove specific risks of companies. If your time horizon is 10+ years, ideally every asset should be in growth assets like stocks. If you have 30% of your portfolio in bonds that money will be losing to inflation over the next 40 years. Your only hope is a diverse mix of assets that can keep up with inflation.
So what is the other 30% of your portfolio in? Bonds? For a 24-year old, I consider that extremely risky.
It always tickles me when someone says something such as “the market has become increasingly volatile” or “given the current volatility in the market”. Volatility is the nature of the market – when has it not been volatile? It’s important to understand that, without volatility, investors would not be able to capture the superior long-term returns of stock ownership. Volatility is a wonderful thing and is NOT the same as risk. Risk is the chance of a permanent loss of wealth. Proper behavior in managing a properly diversified portfolio of equity mutual funds is one of the easiest and least-risky ways to build wealth that I am aware of. But you have to understand that investing in equities is only for long-term investors and that betting on single stocks does not make up a properly diversified portfolio.
Read the 2013 version of Nick Murray’s book, Simple Wealth, Inevitable Wealth, draw up a financial plan to live by, and put together a properly diversified portfolio. It’s one of the best decisions you’ll ever make.
Rather than looking for high risk stocks, look for high return stocks.
There are plenty of risky stocks out there, and many of them have not done well. Instead of looking for investment that match your risk, look for investments that are solid investments. Sometimes these investments are more risky, but you can assess each one based on your risk tolerance. Trying to match your risk level to investments that are risky just because you are young is a fool's errand. In general it is a bad idea.
I hope this helps.