You are young and would like to start investing? Investing can be very intimidating. After all, most cannot afford to lose the savings that they have worked very hard for. For this reason alone, investing can be quite nerve racking to dive in to. The truth is, more people ages 20 through 30’s should be taking advantage of the opportunity that investing offers. In order to leap over this hurtle, the best thing you can do is learn more, learn what the best investment strategy for you is! We will look at the best investment strategy for young investors, in fact for all investors really.
The Basics – Best Investment Strategy for Young Investors
There’s a very important point to investing, and that is to be safe with your savings. Do not lose your investment!
The way we accomplish this is to use a balanced and diversified portfolio. We don’t try and time the market and we don’t try and predict which stock is going to turn you in to a millionaire. In fact we will not even consider stocks, here is why:
Firstly, a stock is a share in ownership of a company that is traded on what is known as the stock market. Stocks can be very rewarding to own, however high reward does come with high risk. Owning a diversified portfolio is how we could minimize investment risk. If you own only a small amount of companies and one of them turns belly up, it could put a serious dent in your net worth making it difficult to recover from.
From what I have read, most professional investors are not able to agree on the total amount of stocks required to properly diversify. It seems most would say somewhere between 30 and 50 is required. This makes it very difficult for the average investor for two primary reasons. First, one would have to have a large enough investment so that 1/50th of the investment is not going to be only a couple thousand dollars invested in to one stock. The second primary reason is that it would become much more difficult and time consuming to properly maintain balance within this diversified portfolio.
The Exchange Traded Fund – Best Investment Strategy for Young Investors
For most investors ETF’s are a much better investment solution. Here is a recap if you haven’t read the types of investments page. ETF is an acronym for exchange traded funds. They consist of assets such as stocks, commodities and bonds and they trade on the market just like stocks would.
Here we use ETF’s to diversify within a specific sector or type of ETF. For example you could invest in United States, Canadian, or Foreign Market Index ETFs, Sector and Industry ETFs, Dividend ETF’s and lastly Bond ETFs. (There are more) The key to an ETF is that the one fund could consist of well over 1000 stocks! Can you say diversified? If one company within the ETF were to fail the entire ETF would likely not even flinch.
But that’s not the whole picture. Investing in ETF’s that closely follow an index is important. There is a very good reason one would want to do this. On average Indexes have proven to increase between 6 and 8% (some years more and some less) per year since the 1930’s. Many investors set their goal by saying they wish to beat the index. Then there are many who fall much below the typical index average. However, I don’t need to guess which stock, fund or anything is going to outperform the next. I simply have 80+ years of data demonstrating that following indices provides an average for long term investing of 6-8% gains.
Building your Portfolio – Best Investment Strategy for Young Investors
The next challenge is diversifying your ETF portfolio with different types of funds. I would recommend an absolute minimum of 3 to 4 ETF’s to get started, preferable to smaller investments. If you are investing a larger amount, $50 000 or more, you may purchase more funds for further diversification.
The asset types and weightings that you choose should be loosely based on the following breakdown.
- 22% USA Equities
- 18% Canadian Equities
- 20% International and Emerging Markets
- 40% Fixed Income
To build your portfolio, use the asset weightings as above and select them in order to populate each type. ETF’s vary in a very wide range fashion, there are plenty of ETF’s to complete your portfolio suiting your investment style. Be certain to follow key indices in the larger markets. I would highly recommend spending some time searching for ETF’s from popular investment management companies.
There is one area that you can massage to suit your personal investment strategy and we must mention this for clarity. Many professional investors would say that it is OK to be more aggressive since long term investing can mean 25+ years. To be more aggressive, one would allocate less weighting to the fixed income, moving the weightings to the remaining assets. However, our objective is to not compromise safe investing for greater growth as we don’t necessarily know what long term means to different people. The weightings above will suit the average young investor best.
Balancing Your Portfolio – Best Investment Strategy for Young Investors
There is a small amount of maintenance that you must perform in order to keep your desired weightings. As certain assets grow in value, the weighting for that particular asset will become higher than the goal weighting. At the same time, another asset type may be dropping in value, therefore dropping in weighting for that particular asset type. What you have to do is re-balance your portfolio such that you arrive at the original goal weightings. You may do this by either buying the assets that are not at your target weighting and selling the ones that are over the target waiting. Or what you can do is top your investment account off and buy assets that are low in value. You would need to purchase just the right amount so that your new balance allows each asset type to match your goal weightings.
For example, let’s consider a very easy (not realistic) 2 asset portfolio of $100. We will have 2 assets, Asset A will be invested with a weighting of 60% at $60 and Asset B with a weighting of 40% at $40. If Asset A climbs to $85 and Asset B drops to $35, we can re-balance by finding the total value – $120 and multiply by our percentage to see where we need to get back to. This will end up being $72 for Asset A and $48 for asset B. Simple example but you get the idea. If you would like to read more on how portfolio balancing works, follow this link.
I have 4 accounts, do I need 4 portfolios?
No, you can have as many accounts as you need. The key is treating all the accounts as one large portfolio. Surely, having more than one account does make investing a tad bit more challenging, however it would be much more difficult if not nearly impossible to manage several small portfolio’s having the exact same weightings and assets.
The economy is booming, should I wait?
The quick answer is no! You do not want to time markets. Trying to time the markets could result in you losing out on some very big opportunities. Keep in mind that you have the opportunity to collect dividends the entire time your portfolio is active. Nonetheless, the market may continue to push further, much beyond your
The best investment strategy for young investors is to play it safe. Don’t get involved in trading stocks or if you do prepare yourself for the consequences of high risk high reward investing. Purchase Exchange Traded Funds as they are much more predictable, can follow key indices that have proven gains over many decades and are well diversified.