I'm young with little to invest. What would you recommend?
What to invest in when you're a youngster just starting out
Firstly, well done for starting early. Building wealth takes time. It is often a slow (but very rewarding) grind to financial freedom. The earlier you start, the better. Let me demonstrate the power of compounding with a simple example:
The S&P 500 has returned about 10% every year since 1926. If you are investing R50 a month at 10% returns a year, after 40 years you would have roughly R277 000. If you invested R100 a month, that number quickly jumps to roughly R555 500. Even small deposits can make a difference over time.
To answer the question posed in the title, we must determine the following:
- Risk profile of the typical young investor
- Asset allocation based on the risk profile
- Individual stocks vs ETFs
Your risk profile is a combination of your investment goals, ability to take risk, and willingness to take risk. Every individual is different. Young people generally have more room for risk as they have so much more time to invest (and recover from market downturns).
Asset allocation based on risk profile
Since you may have room for more risk than the average investor, you can think about dipping into riskier assets such as small-cap stocks and cryptocurrency. These assets present investors with the opportunity to generate above-average returns if they can stomach the volatility associated with it.
Remember to always keep a balance. You might be overweight on risky assets, but always make sure to keep a diversified portfolio. I would suggest the following allocation:
- Cash                     5%
- Bonds                   5%
- Property              5%
- Stocks                  70%
- Crypto                  15%
Individual stocks vs ETFs
Managing individual stocks can be daunting. You have to stay updated on your investments, and you have to constantly manage your emotions as the price increases and decreases. ETFs are easier as it contains a diversified portfolio and is managed by another entity, such as Satrix, Easy Equities, or FinMeUp.
As the writer of this article, I personally invest mostly in ETFs like the Satrix40 and EC10. I also have about 30% of my portfolio that I invest in individual stocks that I have researched and believe in, like Stadio, Apple, Netflix, Santova, and others as can be found on the FinMeUp app. The rest is safely invested in diversified ETFs.