Oran Hall | High school student wants to invest
Question: I am currently 17 years old and I'll be leaving high school soon. They say that the early bird catches the worm, so I would definitely like a jump-start on my financial status. I was wondering if you could advise me on some good investments for a budget of $100,000 $1,000,000. Also could you please share some information on how I would go about creating an investment portfolio with different types of risk tolerance?
FINANCIAL ADVISER: You are right. Starting early is a good way to get to where you want to go and with less hassle and stress. It seems, though, that the range of the portfolio you would want to set up is quite wide.
Nonetheless, the principles for setting up a portfolio are quite similar regardless of the size of the portfolio. I have to make it clear to you that I cannot just say you should take a particular course of action out of the blue. There must be a context. Two persons of the same age having the same sum to invest may take two very different approaches to investing their funds.
The portfolio you build will reflect your risk tolerance. This is not to say you will invest in only one class of instruments. You will need a diversified portfolio, but how you allocate your funds among the different asset classes will vary, depending on your risk profile, among other considerations.
How you distribute your money among the different asset classes will also change with age, personal and financial circumstances, your needs, constraints, and investments objectives as well as with changes in the market and the economy.
Start by looking at your personal and financial situation. At 17, I doubt you are responsible for a family. You are close to the end of the secondary phase of your education. Do you plan to go to the next step tertiary education? Will your parents fund it partially or fully or not at all?
If you are blessed to have a pool of funds for that purpose, how much control will you have over it, and will you use interest and principal, or will you just have access to the interest earned?
If this is not an issue, what needs do you have now and expect to have in the future that your investment portfolio will meet effectively? Bear in mind that you are likely to be more successful with your investment programme if you have a goal in mind to give you more focused direction. These needs will help you to determine your objectives.
There are several investment objectives: security of principal; regular income; liquidity, inflation hedge which may best be achieved by appreciation in the capital values of investment assets tax minimisation; and hedging against unfavourable exchange rate movements.
You can then match your objectives with your needs and investment instruments. If, for example, you identify meeting your day-to-day living expenses as a need, regular income would be an objective, and you would need to invest in instruments capable of generating regular income to you.
But you may also opt for instruments that offer security of principal to ensure that your ability to generate the income you need is not eroded. In this scenario, you are likely opt primarily for short-term interest-earning securities.
In all of this, you cannot ignore your risk tolerance. If you opt to address more long-term goals requiring increases in the capital value of your investments, you would have to settle the matter of your ability and willingness to take risk, for although your goals would suggest that you would need to lean more heavily to the more risky investments, if you are inclined to a more risk-averse approach, you would not want to expose yourself to too much risk.
Other factors that could affect how you structure your portfolio would be certain constraints over which you could have little control. If later in life, for example, you set the goal of buying a house and figure you need to amass money relatively quickly to do so, you could be constrained by several things.
You could, for instance, have to temper your approach to take into consideration the fact that you need to have income to address the education of your children or the needs of a dependent relative.
You would need to consider the above to determine how to distribute your money among the different asset classes to determine what is described in the investment world as the asset mix. Having determined the asset mix, you would then select instruments in the various assets classes to complete your portfolio.
As time goes on, you would need to monitor your portfolio and do periodic evaluations to see if it is meeting your expectations. And much can change your goals, personal and financial situation, market and economic conditions, for example.
To start, familiarise yourself with the various investment instruments. Determine what you want to achieve. Learn which instrument is best for each goal.
Gauge your attitude to risk by notionally selecting and following certain securities for a while. By then, you should be 18 and old enough to have your own account. Then you can seek professional help to create your portfolio.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org