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Portfolio Management Tips For Young Investors

Portfolio Management Tips For Young Investors

Discover how to start building a portfolio and how to manage it for the best results.

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By Investopedia.com 01.02.2012

Too many young people rarely, or never, invest for their retirement years. Some distant date, 40 or so years in the future, is hard to imagine. However, without investments to supplement retirement income, if any, retirees will have a difficult time paying for life's necessities.

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Smart, disciplined, regular investment in a portfolio of diverse holdings, can yield good long-term returns for retirement and provide additional income throughout an investor's working life.

An often stated reason for not investing is a lack of knowledge and understanding of the stock market. This objection can be overcome through self-education and step-by-step through the years, as an investor learns by investing. Classes in investing are also offered by a variety of sources, including city and state colleges, civic and not-for-profit organizations, and there are numerous books targeted to the beginning investor.

However, you've got to start investing now; the earlier you begin, the more time your investments will have to grow in value. Here's a good way to start building a portfolio, and how to manage it for the best results.

Start Early

One reason to start saving early is that usually the younger you are, the less likely you are to have burdensome financial obligations: a spouse, children and mortgage, for example. That means you can allocate a small portion of your investment portfolio to higher risk investments, which may return higher yields.  

When you start investing while young, before your financial commitments start piling up, you'll probably also have more cash available for investing and a longer time horizon before retirement. With more money to invest for many years to come, you'll have a bigger retirement nest egg.

To illustrate the advantage of value investing as soon as possible, assume you invest $200 every month starting at age 25. If you earn a 7% annual return on that money, when you're 65 your retirement nest egg will be approximately $525,000. However, if you start saving that $200 monthly at age 35 and get the same 7% return, you'll only have about $244,000 at age 65.

Diversify

Select stocks across a broad spectrum of market categories. This is best achieved in an index fund. Invest in conservative stocks with regular dividends, stocks with long-term growth potential, and a small percentage of stocks with better returns, along with higher risk potential. If you're investing in individual stocks, don't put more than 4% of your total portfolio into one stock. That way, if a stock or two suffers a downturn, your portfolio won't be too adversely effected.

Keep Costs to a Minimum  

Invest with a discount brokerage firm. Another reason to consider index funds when beginning to invest is that they have low fees. Because you'll be investing for the long-term, don’t buy and sell regularly in response to market ups and downs. This saves you commission expenses and management fees, and may prevent cash losses when the price of your stock declines.

Discipline and Regular Investing

Make sure that you put money into your investments on a regular, disciplined basis. This may not be possible if you lose your job, but once you find new employment, continue to put money into your portfolio.

Asset Allocation and Re-Balance

Assign a certain percentage of your portfolio to growth stocks, dividend paying stocks, index funds and stocks with a higher risk, but better returns.

When your asset allocation changes (i.e., market fluctuations change the percentage of your portfolio allocated to each category), re-balance your portfolio by adjusting your monetary stake in each category to reflect your original percentage.

The Bottom Line

Disciplined, regular, diversified investment in superannuation and smart portfolio management can build a significant nest egg for retirement. A portfolio with dividends and the sale of profitable stock can provide cash to supplement employment or business income. Managing your assets by re-allocation and keeping costs, such as commissions and management fees, low, can produce maximum returns. If you start investing as early as possible, your stocks will have more time to build value. Finally, keep learning about investments throughout your life, both before and after retirement. The more you know, the more your potential portfolio return, with proper management, of course.

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