Table of Contents
Introduction
Creating a robust portfolio is essential for long-term growth and developing good risk management strategies. As a young investor with the advantage of time, you can secure your financial future by leveraging several investment strategies early, giving the benefit of making a high yield over a long period.
This article will explore how to build investment portfolios for young investors and explore essential aspects like the time horizon advantage, the need for asset allocation, understanding diverse investment options, developing risk management strategies, and learning the benefits of automatic investing.
Time Horizon Advantage
Investment time horizon is the period one holds on to an investment until it is needed or for a specific goal before selling. Time horizons could be short or long, depending on the goal attached to the investment. The longer the time horizon, the more aggressive an investor can be in his portfolio.
Young investors have the advantage of time. Investing at a young age allows for the opportunity to have a longer investment time horizon, allowing for significant investment returns. Starting an investment at an early age allows modest returns to grow gradually over time. Let’s explore some benefits of long-term time horizon;
1. High Returns– The longer the investment plan, the higher the return will likely be. Taking long-term risks also helps to pay attention to long-term goals, thereby helping with long-term growth before building short-term or immediate finances.
For example, if a 25-year-old from South Africa invests $1000 with an annual return of 10%, by the time they are 50, the investment would grow to about $10,000. Imagine a 35-year-old making the same investment; his investment would be approximately $4000 to $5000 in returns.
2. High-Risk Tolerance– A long-term time horizon allows young investors to take more aggressive long-term risks with potentially higher returns. In contrast, older investors have lower risk tolerance and are wary of high-risk and volatile markets. A young investor can buy stocks instead of bonds, as stocks are high-risk and have higher returns than bonds; older investors gravitate towards bonds because of their stability even though they offer lower returns than stocks. Stocks also take longer to mature than bonds, and young investors have the time horizon advantage to navigate these risks and get good returns.
Importance of Asset Allocation
Asset allocation is a diversification strategy that involves investing in different asset classes like stocks, bonds, real estate, etc. This strategy balances risk and reward dynamics, preventing reliance on one asset class or sector to mitigate risk. For example, investing in stocks and bonds means you can get short-term rewards from bond investments and long-term rewards from stocks. Another example is in cases of economic downturn, some categories, like stock, could suffer, and other classes, such as bonds, tend to do better.
The following are asset classes that young investors can invest in to build a good investment portfolio:
Stock: Stocks represent part ownership of a company. Buying stocks in a company refers to having a claim on the earnings and assets of the company. The value or asset of the business usually determines the value of the stock. Buying stocks is advisable for young investors as they offer higher returns over a long period. Stocks should take a large portion of young investors’ portfolios because they have the time horizon for long-term investment and high-yield returns.
Bonds: Bonds are short-term investments where you lend money to the government or companies over some time, within an agreed time frame and agreed interest rate. You can either gain from a bond by receiving the face value of the bond plus the agreed interest or by selling the bond. They are lower risk and provide short-term income. As a young investor, bonds can take a small part of your portfolio for short-term returns and keep you afloat while other investments like stocks mature.
Real Estate: Real Estate investing refers to the sale, management, and rental of real estate (land, buildings on it, and its natural resources) for profit making. Real estate investment is very lucrative and low risk. The low risk of property investment would help balance investing in high-risk asset categories. You can purchase real estate property by paying an agreed deposit at first and paying the rest later over time – a plan that is helpful for a young investor. Property investment can give a high return on investment. Real estate has one of the highest capital appreciation, allowing for a steady income and a diversified portfolio.
Cash investments: Cash is a liquid form of investment. While the returns are low, they are effortless to access and helpful in emergencies. Cash investments are usually low risk, low return, and low interest, but they are cheap to access.
Minimizing risks and maximizing returns with Asset allocation
Diversifying your investments helps you mitigate risks. Long-term investments usually come with high returns and risks; therefore, combining several investment plans can reduce the overall risk of your portfolio. Low-risk investment plans can help you balance out high-risk investments instead of putting all your investments in the same place.
Asset allocation can maximize returns over time. You can start by putting a significant percentage of your portfolio in lower-risk investments and then study economic movements. Over time, you can venture into high-risk investments you have monitored. Gradually, you can increase your returns on investment over time.
Investment Options for Young Investors
As a young investor, you can choose from several investment plans and choices. Each of these options has its benefits, risks, and maturity period. They are:
Stocks and Bonds
Stocks refer to the collection of ownership in a company. Buying a company or business stock means owning a part of the business – earnings and assets. Stocks allow investors to participate and benefit from the company’s growth and assets. Stocks bought from a successful company allow for a high return on investment, and some stocks pay dividends. Young investors can take advantage of the time horizon and invest in stocks since they take time to mature and require a long-term strategy. Stocks offer higher returns but are vulnerable to market volatility.
On the other hand, bonds are short-term investments compared to stocks. Bonds are loans that investors give the government or corporations, usually returned within a stipulated time and with a fixed or agreed interest. While they might not yield as much profit as stock, they are safer and provide steady income. Young investors can consider putting a percentage of their investments in bonds. Bonds are not risk-free; they are rare cases in which the corporation or government money is lent to default on payment.
For young investors, stocks offer a high return on investment but require patience due to fluctuations in market prices. Since bonds have lower risk and more stability, you should invest in both stocks and bonds so that they balance each other out.
Mutual Funds and ETFs
Mutual Funds are when several investors pool their money to invest in diverse investment options like stock, bonds, and real estate. A professional fund manager decides or advises these investors on what to invest in and what percentage of their money should be put into each security. Simply put, a mutual fund is when a group of investors contribute money and employ an investment expert to decide the best and most profitable way to invest it. This option is handy for young investors, especially when there aren’t enough funds to sponsor your investment goals. As an inexperienced investor, you can rely on the expertise of a professional to know where to put your money.
ETFs (Exchange-Traded Funds) are similar to mutual funds and share similarities to stocks but are distinct in structure and function. Much like stocks, ETFs are traded on stock exchanges. What sets ETFs apart is their ability to be bought or sold throughout the trading day. ETFs are flexible and have lower costs than mutual funds.
Real Estate
This is also known as property investment; as the name implies, it means buying houses, lands, and apartments and making money by renting or selling it later when the property appreciates. Real estate is one of the few tangible or physical investments with excellent market value, leaving you with an assured mind. However, it would be best to remember that property does not easily translate to cash and can take time before selling properties.
Cryptocurrencies
Cryptocurrency, like Bitcoin or Ethereum, is digital money used as a medium of exchange through technology. The government, bank, or central body does not control or determine its value. It has become one of the emerging investment options, especially amongst early-stage investors, because of its high returns and exceptional market growth prospects. Cryptocurrency is one of the investments that young people can relate to, as it has high returns and encourages innovation. It is also relatively easy to sell at any time.
Before investing in crypto, you should consider the risks. Crypto prices can change at any time, meaning that a previously high price on a currency can fall at any time; hence, there is a need to monitor the market constantly. Also, you should note that government policies can affect crypto trading. Cryptocurrencies are liable to government policies; therefore, the country and its policies should be considered before investing. Due to its volatility, a small portion of your portfolio can be invested in cryptocurrency with extensive research.
Risk Management Strategies
If you want to build a robust portfolio and have long-term growth, you must learn how to reduce risks in your business. While all types of investments have risks, learning to mitigate them would reduce loss to a minimum. Here are strategies that you can adopt for risk management:
Diversification: Sharing your investment amongst different asset classes is one of the best ways to reduce risks. In economic downturns, investing in only one asset class means that all that investment could go down the drain, but a widespread set of investments allows for the risks to be shared and balanced out. When one category is suffering, another will be booming and reduce loss. Diversification refers not only to asset class but also geographical locations. For example, suppose you have equities in America and another in South Africa, and there is a decline in the South African economy. In that case, American investment can compensate for the loss.
Insurance: An adequate insurance plan helps reduce the cost of unexpected events. Health, life, and property insurance protects from financial setbacks. Insurance means you do not have to sell your investment or make rash decisions in unforeseen circumstances.
Portfolio Rebalancing: Rebalancing and reviewing your portfolio helps ensure that the investment percentage in each asset allocation aligns with your goals. Also, when you understand the market better, you can reduce the rate of underperforming assets and increase them to potentially beneficial ones. A regular portfolio review also helps you invest in new and emerging market opportunities.
Emergency Funds: Having money saved somewhere also helps to manage risks and losses. Stashing a percentage of your income for emergencies is a relief during an economic crisis, as you would not have to liquidate your assets. Your emergency fund should keep you afloat and cover living expenses for some time without the need to sell your investments during poor market situations.
Automatic Investing and Building Investment Habits
Automatic investing means having consistent and automatic contributions to investment accounts, regardless of economic situation. It involves spreading out investment over time, reducing risks and market fluctuations. It refers to regularly contributing a percentage or an amount to an investment using auto transfers. You can set an amount to be removed from your account at a set interval. Automatic investing is essential for young investors as they learn to be disciplined with money and develop good investing habits.
Building Good Investment Habits
As a young investor, you should develop a disciplined investing habit early to ensure long-term financial growth. The following are tips to help you create a good investing habit:
Goals: Set long-term and short-term financial goals, as they will help you to remain focused. Setting goals will help you know how to prioritize and where to invest your income and profit.
Budgeting: This will help you determine what portion of your income you want to invest. When you create a budget, you know how to spend and diversify your income.
Research: Learn about different investment options, risks attached to them, risk management strategies, and different information on investment. Be hungry for for knowledge. It would help if you also created a habit of studying the market and economy.
Frequently Asked Questions (FAQs)
1. Why should I start investing early?
When you start early, you can easily take on high-risk and long-term maturity investments. It would also help you grow significantly over time.
2. What is the best investment option for me as a young investor?
There is no best investment option, as all options have unique risks and returns. When building your portfolio, you should diversify your investments. A mix of different asset classes is advised.
3. Can I start investing with limited funds?
Of course! You can start with what you have and gradually work to the top. If you are consistent, your income will grow progressively. Read our article on starting investing with a limited budget here.
4. How can I reduce the risks and losses of investing?
One of the best ways to reduce risk is through diversification—investing in equities, bonds, real estate, and startups. It is also advisable to get good insurance and maintain an emergency fund.
5. Is it safe for me to invest in cryptocurrencies?
Cryptocurrencies are one of the most volatile investment options. Only investing a small percentage of your investments is advised, depending on your risk tolerance.
Conclusion
Investment portfolios for young investors can be leveraged over time. Young investors have a longer time horizon in the market, allowing a good return on investment. With the right strategy, such as asset allocation, diversification, risk management, and automatic investment. Start early and be patient while the investment grows gradually.
