Overall, for young investors the objective is to grow wealth as much as possible, as early as possible. Personally, I will not be selling my investments for decades. For this reason, I have 100 percent of my money invested for long-term goals (retirement) in a diversified stock portfolio.
Stocks have a higher expected return than bonds or cash, and this return difference magnified over long periods of time can be staggering. I view any money I have that is not invested in the stock market as potentially missing out on the returns I need to materially build my wealth.
As a bonus, the temporary declines that are typically considered the downside of investing in stocks are actually a benefit to a young investor like me who is still purchasing stocks. I get to buy the same stocks I intended to purchase at lower prices, and have plenty of time to wait for a recovery. The major price swings we have experienced lately should not be a cause for concern for young investors, but a golden opportunity to buy at lower prices.
I have to specify that I invest all in stocks because it works for my long-term goals. If someone is setting money aside for an emergency fund or is looking to buy a house, for example, holding cash or bonds is a more appropriate investment strategy.
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With that said, I always emphasize there is a cost to holding any amount of bonds or cash, especially for young investors whose investment decisions will be compounded over decades.
I don’t try to beat the market. Markets are incredibly efficient at incorporating all available information into prices; any attempt to outguess them is likely to end in failure. The vast majority of professional active managers underperform their benchmarks. I can’t image amateurs or semiprofessionals fare any better.
I follow a simple, diversified, buy-and-hold approach using low-cost index funds instead of playing the guessing game of attempting to own the right investments at the right time.
Instead of trying to pick the right stocks, I buy thousands of stocks in an asset class using a low-cost index to reap the returns of that asset class in the most reliable way possible — by holding them over long periods of time.
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