Tips for young – 30-years-old-and-under – investors (Part 2 of 2)
December 23, 2006
(Second of a two-part series)
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. Often, learning by doing is the most effective way to becoming 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 often 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 easy – that's why the Wall Street wizards make the big bucks. There are resources around to help you, online and in the real world. And if something really has you stumped, ask your broker for help – it's part of his or her job to make sure that you understand what's happening to your money.
It may take you a while to get the hang of it, but there are advantages to being a young investor, too. This generation is probably more financially savvy than the ones that preceded it, and with all of the investing education resources now available (online, in books and magazines, on TV), today's young investors have a substantial edge over their predecessors.
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 10% returns but spread your positions too thin, the return you'll need just to get past commissions could be close to or more than 10%. It's a pretty 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 hardest things to do can be getting 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 $0.20 per share, but invest with your mind, not with your gut – if a price is artificially inflated, it's a lot more likely to fall hard. Trust your analysis.
It's pretty 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%, 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.
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.
- From "Portfolio Management for the Under-30 crowd" by Jonas Elmerraji published on http://www.investopedia.com/. Jonas Elmerraji is the founder and publisher of growFolio, an online business magazine for the under-35 crowd, which provides business sense with just a dash of pop culture for future tycoons. Jonas is currently a financial economics major at the University of Maryland, Baltimore County.