Best Investment Strategies for Young Investors in 2023

Investing can be an exciting but overwhelming journey, especially for young and inexperienced investors. In 2023, there are several key strategies that can help you navigate the market with confidence. This article will explore some effective approaches, particularly focusing on swing trading and utilizing options for long-term gains. By adopting these strategies, you can position yourself for successful investment outcomes over both short and long periods.

Understanding Swing Trading

Swing trading involves buying and selling securities (such as stocks, commodities, and options) fast enough to take advantage of short-term price fluctuations while maintaining a longer-term investment strategy. This method is particularly appealing to young investors due to its flexibility and potential for quick returns. To get started, it is essential to have a strong understanding of the market and to develop a quick wit for spotting opportune entry and exit points.

Building Your Investment Portfolio

One of the fundamental steps in swing trading is building a diversified portfolio of approximately 50 quality stocks. These can be categorized into different sectors to ensure a balanced exposure to various market conditions. A well-diversified portfolio can help mitigate risks and enhance the overall performance of your investments.

Portfolio Composition

Your portfolio should have a mixture of different asset classes:

Commodities: This sector includes raw materials such as metals, energy sources, and agricultural products. Commodities have historically provided a hedge against inflation, making them a valuable addition to your investment portfolio. Tech: The technology sector is known for its growth potential and innovation. Investing in companies that are at the forefront of technological advancements can yield substantial returns. Other: This category includes a mix of industries such as healthcare, finance, and consumer goods. These sectors offer a diverse range of opportunities for growth and stability.

By maintaining a close watch on your chosen stocks, you can identify promising opportunities for swing trading. This requires regular analysis and monitoring of market trends and news related to your portfolio's industries.

Using Options for Leverage

One of the most powerful tools in a young investor's arsenal is the use of options. Options provide a form of leverage that can significantly enhance your investment potential. In the context of swing trading, using long-term options (LEAP) can be particularly advantageous when the market experiences significant pullbacks.

Buying Long-Term Options

Long-term options (LEAP) are contracts that expire in more than two years. These options offer higher leverage and more time for the underlying stock to reach a desired price point. Rather than buying the stock itself, it is more beneficial to buy the option to buy the stock at a predetermined price.

For example, consider a situation where a stock has fallen to a three-year low, and you believe it will recover in the near future. Instead of buying the stock directly, you can purchase a long call option with a strike price set at 50% of the current pulled-back price. Being smart about your timing is crucial; major pullbacks happen every few months and are prime opportunities to act.

Selecting the Right LEAP

When choosing a long-term LEAP, it is important to ensure that the option has sufficient liquidity to avoid excessive bid-ask spreads. Ideally, you should select options with at least 400-500 open contracts. This level of liquidity ensures that you can enter and exit the trade easily without significantly affecting the price.

A Practical Example

To illustrate the effectiveness of these strategies, consider the case of Square Inc. (SQ). In November 2023, SQ had fallen to a three-year low, reaching about $40 per share. While at first glance, purchasing 5000 shares at this price might seem attractive, a more strategic approach is to buy a long LEAP call option.

For instance, if you bought a LEAP call for SQ at a strike price of $20 with an expiry date in January 2025, you would pay approximately half the cost of buying the stock outright. This option gave you an additional year to two years to see the stock price increase. By monitoring market conditions closely, you can make a decision to either hold the option or sell it if you achieve a decent profit, such as when the stock price rises to $70.

Developing a Sustainable Investment Plan

One of the most critical aspects of successful investing is developing a consistent and repeatable system. By focusing on a select group of stocks for the long-term, you can reduce the risk of making hasty decisions and improve your overall investment discipline.

For example, a young investor might have a core list of 50 stocks, with about 1/3 invested in each of the three main categories: commodities, tech, and other. Regularly reviewing and updating this list based on market conditions and personal criteria can help you stay on track and make informed investment decisions.

Conclusion

Investing for young investors in 2023 can be both thrilling and challenging. By mastering swing trading, diversifying your portfolio, and leveraging options, you can position yourself for success. Remember to stay nimble, monitor market trends, and maintain a disciplined approach. With the right strategies and mindset, you can navigate the complexities of the market and achieve your financial goals.