Face it: As a person who hasn't yet turned 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 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.
How to Pick 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. Since preserving your nest egg isn't yet 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. However, 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 From Your Portfolio
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 simple – 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 or financial advisor for help – it's part of their 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 came before it. Having witnessed huge economic changes and trends, not to mention all of the investing education resources now available (online, in books, magazines, and on television), today's young investors have a substantial edge over their predecessors.
Making Trades and Analyzing Results
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 ten percent returns, but spread your positions too thin, the return you'll need just to get past commissions could be close to or more than ten percent. 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 percent, then 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.