The current market is ugly. Most investors are losing money. However, if you are a new or a young investor, you shouldn’t be troubled by today’s market. You should be encouraged because you have better entry points. You do not want to start investing at a high time in the market which is usually what everyone does. Then stocks correct and the new investors pull their money out. The result is a loss and a short lived investing career.
So, today, I am going to look at a simple approach to where I’d put five grand right now. This advice is targeted towards young investors or new investors, but may be helpful to anyone.
I would split the five grand into three chunks; these can be equal or slightly unequal, but I’d keep them fairly close in terms of size. These three chunks will then go into three positions as follows:
- Philip Morris Int’l (PM) – This is a great long term growth story with great exposure to emerging markets and brings a strong dividend to the table. This stock is pretty low risk.
- Veolia Environment (VE) – This is also a long term play that gains exposure to the growing water crisis around the world. The stock has a great dividend yield and is way off its highs which presents a great entry point. This stock is medium risk. The company carries some debt and the water story could take a long time to play out to get a huge return, but the dividend yield should help while you wait.
- Chesapeake Energy (CHK) – The last chunk of your money should go into this natural gas play. All of the investors that got caught up in the commodities and energy boom are now mostly out of these positions, as such the stock is down almost 50%. Now, is a great entry point for a strong company poised to benefit from any favorable policy towards natural gas or and continuation in the commodities boom cycle. This stock is higher risk and anything related to commodities will have some violent ups and downs.
The result of this selection of three positions is a very diversified selection in terms of industry and risk. PM and VE will offer some nice dividend cash flows with the hope that CHK might hit a home run in the next year or two. The beautiful thing is the highest risk stock in this portfolio (CHK) has already been hit hard by the decline in natural gas prices, so most of the downside should have already taken place. This is not to say there isn’t anymore to come, but hopefully current levels are a DECENT entry point.
As I’ve said many times on this blog, these stocks have my eye. I’m hoping these stocks hold their current levels until the start of 2009, so I can immediately put another five grand (actually $5,500) into these positions in my Roth IRA.
If you are a young professional that has had their investing experience limited to their company’s 401(k) plan but have been wanting to break into your own managed portfolio, I encourage you to do so. Use the approach outlined here as a starting point for your research. Even if your performance isn’t what you had hoped, you will learn far more managing your own portfolio than by simply participating in a 401(k) plan. Take a shot!
Last word: This allocation of funds will not function properly if you plan to pull this money out in the near term or sell the positions. If you think you’ll need this money in the next year or so, or think you will sell if a position drops 10%, I’d recommend you disregarding everything you just read.
Remember, don’t invest blindly based on any advice you read here. Do your own research before making any financial decisions. Buying stocks comes with risk of losing money!
Any questions? Leave a comment below. Good luck!
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Eric | 13-Sep-08 at 10:14 pm | Permalink
Index. Go with a growth stock index or even the stodgy S&P 500 index ETF. If you are in your 20s, then you have like 100 years before you will retire. Don’t waste time looking at individual stocks unless you honestly are going to invest a LOT of time. Investing can be hard work – why not just go with the averages and spend the rest of your mental energy on other tasks?
Ken | 15-Sep-08 at 6:45 pm | Permalink
Nah. Buy gold.
When the current manipulation is over gold will explode.
An Alternative Investing Approach For Young Investors : Generation X Finance | 17-Sep-08 at 9:15 am | Permalink
[...] If this approach makes you nervous, consider finding companies in different industries to help protect you from a potential losing sector or industry. Also, perhaps consider not having all growth stocks. Combine a value play with a nice dividend yield along with a potential growth play. For an example portfolio of three stocks, read my post on Where A Young Investor Should Put Five Grand. [...]
marketfolly | 17-Sep-08 at 10:57 pm | Permalink
CHK is a solid choice especially with a longer term timeframe. their insider buying has been insane… the ceo has millions of shares now that he bought on the open market, not in company stock options. one thing you might be interested in for criteria to select your investments is institutional ownership. because after all, the big boys with the big money control where the markets go most of the time. so, its always good to know which big hedge funds or mutual funds have positions. i cover numerous hedge funds if you’re interested in that info.
oh btw, can’t go wrong with PM either… solid company.
keep up the good work
marketfolly.com
Energy Back Up As Dollar Weakens On Bailout Activity | 20s Money | 22-Sep-08 at 9:02 pm | Permalink
[...] declining. Chesapeake Energy (CHK) is one of my biggest holdings. I also mentioned recently that young investors should consider Chesapeake in their selection of a few stocks if they were going to invest five [...]
Blake | 29-Sep-08 at 10:01 am | Permalink
While I agree that those look like solid companies, I’m becoming more and more of a fan of really defensive investing. In this world, anything can happen any time to even the most solid of companies, and to a newbie investor who only holds 3 positions, the lack of diversification could cause a large drawdown and ultimately a completely shaken sense of confidence.
I like what both Eric and Ken said. Spend half to buy an index, spend the other half on physical bullion in case our financial system really does fall apart.