Many young investors are hesitant to get started when it comes to investing. Even with ample cash to put to work, many millennials who should be in stocks are choosing instead to speculate on alternative assets like cryptocurrencies with the hopes of getting rich quickly. Others may take an overly conservative approach by being overweight bonds, which is also not the best strategy for young investors.
Speculating isn’t investing; it’s more akin to gambling. And although you could make a profound amount over a short period of time, you could stand to lose your shirt the longer you hang on to such investments. On the flip side, being overly conservative is also a risky strategy over the long haul, since decades’ worth of tax-free compounding from a TFSA would be surrendered in favour of meagre returns from bonds, which are barely able to keep up with inflation.
Taking excessive risks or not taking enough (or any) over the long haul can be detrimental to a young investor’s portfolio. Long-term bonds and speculative assets like Bitcoin get riskier the longer you hang on to them. High-quality stocks become less risky the longer you hang on to them. Think about stocks as fine wine, and think of speculative assets or long-term bonds as milk.
Which beverage would you rather store in your cellar at room temperature for decades?
Warren Buffett has also previously noted his distaste for both speculative assets like cryptocurrencies as well as “safe” assets like bonds, both of which are inferior to stocks over the long term.
“In any upcoming day, week, or even year, stocks will be riskier — far riskier — than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.” wrote Buffett in his annual letter to Berkshire Hathaway Inc. shareholders.
With this in mind, young investors need to be honest with themselves with regards to their investment horizon. Although young people, on average, can afford to take more risk, this is not the case for everybody. If you’re a young investor with a time horizon of a decade or more, then the answer is clear: you should be in stocks. Over the past decade, the S&P 500 has nosedived twice, and if you didn’t do any panic selling, you’d be up big time!
For those young investors who are still hesitant when it comes to stocks, it may be a good idea to invest in low-beta stocks as you gradually find your investment legs with time. Consider Waste Connections Inc. (TSX:WCN)(NYSE:WCN) or Royal Bank of Canada (TSX:RY)(NYSE:RY) as “fear-free” stocks to start a long-term investment portfolio. Both stocks have returned a profound amount back to investors over time, and with their above-average, forward-looking dividend-growth rates, young investors should simply hang in there and collect the payouts while they learn more about themselves as investors.
Stay hungry. Stay Foolish.
