Which Type of Portfolio Might Be Right For a Young Investor Who Is Not Afraid of Risk?
The types of investments available to young investors vary from one another. They range from the small cap to the large cap. These investments are categorized by their risks and returns. The following article will discuss the three types of investments and their respective risk factors. Young investors who aren't afraid of risk should concentrate on stocks. Stocks are shares in a company that gives the owner profits based on the performance of the company. Although stocks are risky, their returns are much higher than other types of financial instruments.
High growth High Risk
Choosing a risk profile for your portfolio is an important step towards achieving your financial goals. While you will want to minimize the risks involved, you should also look into the time horizon of your portfolio. A young investor should consider investing in a portfolio that will give him or her more time to weather market fluctuations.
As a young investor, you might be tempted to take on high risks, but there are risks associated with such investments. It's important to remember that risk can also bring about huge returns. Hence, you should understand your risk tolerance and your behavioral tendencies before investing. The higher your risk tolerance, the higher the return will be. If you're unsure about your risk tolerance, ask yourself questions like "How much risk do you want to take?"
Not all risk is made equal. Diving head first into Options trading as a new investor is a risk that likely isn't going to play out well. At the same time throwing your whole portfolio into a penny stock your neighbor told you about is also fool hearty. I'll just say it, never take investment advice from your neighbor. The route I took was to invest into companies that I understood. This is also advice that Warren Buffet gives stating “The important thing is to know what you know and know what you don't know.” Yep, arguably the greatest investor of all time just agreed with my statements about options and penny stocks.
that doesn't mean don't invest in those things. It only means, invest in them when you fully understand them. Learn the behaviors of the stocks before you trade options and do your research into why your penny stock is likely to succeed.
If you are a young investor who is not afraid of risk and doesn't mind taking risks, a Small Cap portfolio may be right for you. These types of investments require more research and effort to build, and may require you to take on more risks than you are comfortable with. Riskier investments require a higher level of discipline, so you should not invest in them if you're not yet confident enough to make the leap. Do your research and stick to your guns when these small cap investments enter a state of wild volatility. These are the times that you need to hold strong to your research.
Looking at small-cap investments from a macro-level. These investments have more room for growth than their mid and large-cap counterparts. Since they are newer and younger companies, they naturally don't have the same attention that Google and Apple have. Let's go back to what I mentioned earlier about investing in what you know. Let's imagine you are a gamer and you are obsessed with it. Naturally you do your own research into gaming companies and who is out there making a name for themselves. This means you have more information on gaming companies that your boomer parents will never know. This is now your field of expertise. Dig deep into these companies' financials, plans for the future, how much debt they have, which bigger company is looking into buying them, etc..
This is what I mean by do your reasearch.
If you are a young investor who is not afraid of taking risks and isn't yet hesitant to take a few losses, you should build a medium-cap portfolio. Growth stocks tend to offer higher returns than smaller companies, but these companies also have higher risk. Small-cap stocks are more volatile, but also provide higher returns in the long run. You can also create a mixed portfolio by combining both types of stocks.
Another option for a young investor who is not afraid to take on risk is a High-Risk or Large Cap portfolio. These types of funds have higher risk than smaller ones, but they are great for young investors with a longer time horizon. This means they will have plenty of time to learn from their mistakes and work through any financial fallout. The inherent risk is worth it, though, because the reward is higher.
The Large Cap market is closely watched by investors both on and off Wall Street. Investors can easily gather information about individual companies, as well as the market as a whole, and purchase shares of large-cap companies. This hands-off approach appeals to many investors because it requires very little research. Alternatively, they can opt for index funds, which track the large-cap market as a whole, and segmented stocks.
One way I've been able to make big plays on large-cap companies is looking into what certain politicians are doing with their investments. Their trades are supposed to be public so you can see what they are investing in. They know what bills are going to be affected by decisions made by our policy makes and sadly they beat most investment advisors in returns. This isn't the only way I invest into large cap, but if a policy maker drops 2 million on apple stock you better believe I'm looking at it too.
While investing, young investors should keep an eye on news and make sure they do their research before making any purchases. You can also use library resources and the Internet to gather more information about specific stocks or investment funds. Once you've chosen your investment, automate your investments and stick to your plan. Revisit your plan minimum 2 times a year, adjust accordingly. This will build your portfolio over time. Investing without a strategy can be frustrating and ultimately unproductive.
This is not investment advice, I'm not a financial advisor. These are simply techniques I use while investing and if you're looking for ideas you can use this as a starting point.