Young Investor’s Guide to Building a Financial Future—Part 2: Investing for Your Goals

In the first installment of our Young Investor’s Guide to Building a Financial Future, we looked at avoiding credit card debt to set you off to a healthy start, the benefits of investing over the long term and the advantages of doing so in a retirement account, such as a 401(k) or IRA.

In the second part of this two-part series, we discuss three more investment concepts every young investor may want to embrace:

• The importance of diversification
• The dangers of market timing and stock picking
• The benefits of investing according to a plan that fits your personal goals

Get Diversified

Short-term market swings can challenge even the most resilient investors. However, history shows that over the long term, markets tend to smooth out and trend upward. Diversifying your investments involves spreading risk across various types of assets, not just increasing the number of holdings.

While this may make intuitive sense, many investors come to us believing they are well-diversified when they are not. They often hold numerous stocks or funds across multiple accounts, yet upon examination, their portfolios are heavily skewed towards large U.S. companies or narrow market sectors. Diversification is effective because various investments respond differently to market shifts. When one falters, others may thrive, balancing overall portfolio performance. However, if holdings are too similar, the benefits of diversification diminish over time.

In short: 

Investing in a wide range of assets from different sectors, sizes, and geographies can create a robust portfolio that is better equipped to handle market fluctuations over time.

Avoid Speculating

Focusing on broad market indices helps avoid detrimental speculative behaviors that can harm long-term returns. 

Market timing—buying and selling stocks based on breaking news and short-term market movements—often turn out poorly. Because you’re typically buying into hot trends and selling when conditions are scary, you end up buying when prices are high or selling when prices are low. In both cases, that behavior can significantly impact savings and hinder financial goals

In fact, research consistently shows that investors’ attempts at market timing generally underperform broader indices like the S&P 500, with average equity fund investors trailing by approximately 5.5% in 2023 due to poor timing decisions according to a long-running annual survey of investor behavior by DALBAR.

Similarly, stock picking can reduce diversification and increase concentration risk, where a few stocks can heavily influence your portfolio’s performance. Investors are typically rewarded for taking on systematic risk, or risk inherent to the entire market. Concentration risk is not systematic. It is specific to individual stocks and doesn’t reliably yield rewards. Holding a significant portion of your portfolio in a few stocks exposes you to outsized impacts; for example, a single company’s bankruptcy could lead to substantial losses.

It’s also exceedingly difficult to pick stocks that will outperform the broader market over time. In 2023, over 70% of companies in the S&P 500 Index underperformed the index. These results vary from year to year. But since a handful of companies often drive most of the stock market’s returns, choosing just when to sell the future losers and buy the next big winners can end up becoming an impossible—and often losing—game. 

In short: 

Timing the market can lead you to buy stocks when they’re expensive and lock in losses by selling during downturns. When it comes to stock picking, it’s exceedingly difficult to pick single stocks that will be winners, and holding concentrated stock positions can introduce uncompensated risk to your portfolio. Instead, build a diversified portfolio as part of your long-term financial plan. 

Follow a Plan That Fits Your Goals

So how should you divide up your diversified investments? Start with your asset allocation, which is how your portfolio is spread among asset classes including stocks, bonds and cash. Then base your asset allocation on your personal goals, tolerance for risk and the length of time you have to invest. 

In short:  

Build your portfolio based on your personal goals, risk tolerance and time horizon rather than chasing or fleeing hot or cold investments or focusing on generalized rules of thumb.

Interested in learning more about how to take the first steps toward meeting your personal financial goals? Reach out to set up a time, and let’s talk. 

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.