For young investors, stocks are a powerful tool for saving for a comfortable retirement in the future.

According to the investment rule of thumb, such as maintaining a portfolio composed of 60% stocks and 40% bonds, it can provide a beneficial starting point for your investments in the financial market.

However, financial advisors say that for many young investors who are decades away from retirement, it makes sense to significantly increase stock allocation, even potentially up to 100%.

Jake Dempsey, a 22-year-old, is one of these young investors.

This senior majoring in Business Administration at the University of Scranton in Pennsylvania, annually maxes out his Roth IRA first, then puts any additional funds into a taxable account.

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Both of his accounts are 100% invested in stocks.

With no house and no children, Dempsey says he wants to actively invest in stocks now, knowing he won't be able to do this forever.

"I'm at an age where I can take on more risk," says Dempsey.

Every investor's situation is different, and people of any age need to do some financial planning before considering investments: establish an emergency fund and pay off high-interest credit card balances.

But after that, stocks are a powerful tool for saving for a comfortable retirement in the future.

An analysis report from Charles Schwab shows that from 1970 to 2022, the average annual return of an all-stock portfolio was 10.4%, while the annual return of a 60/40 stock-bond portfolio was 9.3%.

Assessing your goals, Josh St. Laurent, CEO of Wealth In Yourself, says that most young investors should at least have an account specifically for investing in stocks, preferably an IRA.

The funds in a Roth IRA come from after-tax dollars, which means that earnings after the age of 59 and a half do not need to be taxed again.

Although retirement is often the main goal, most investors have multiple uses for their money, such as buying a house, sending children to college, planning a wedding, or going on vacation.

St. Laurent says that because of this, deciding the proportion of stocks in a portfolio depends not only on the investor's age but also on the purpose of the funds.

Young clients may choose a conservative asset allocation in an account planning to buy a car next year, while older clients may keep an all-stock portfolio specifically for inheritance purposes.

St. Laurent says that having at least one account entirely for investing in stocks allows young investors to dedicate that account specifically to future life goals, and it also allows investors to understand market dynamics and how to stay calm during market fluctuations.

St. Laurent says, "If you start investing in stocks early, you will develop this ability to take on risk."

When are bonds suitable?

Brad Lineberger, founder of Seaside Wealth Management, says that the benefits of bonds really come into play when retirement is imminent, and investing cash in bonds before that means missing out on the greater potential for stock appreciation.

Lineberger says, "Bonds help to smooth out the trend, reduce volatility, and act as a hedge against selling off during market downturns."

But this is an expensive "insurance," and I would rather let young people understand how the market works, let them believe that volatility is normal, and then invest in stocks rather than bonds.

Investors with an all-stock portfolio will eventually have to shift some of their holdings to bonds.

Lineberger says that discussions about how to make these changes usually start about 10 years before retirement, and the actual transactions occur about 5 years before you give up your nine-to-five job.

Diversification is still very important.

Laura Mattia, a financial advisor and CEO of Atlas Trust Financial, says that for young investors with long-term goals, an all-stock portfolio may be a wise strategy, but diversification is still very important.

It may be tempting to heavily invest in large-cap U.S. stocks such as Meta and Amazon, which rose 37% and 19% respectively in the first quarter of this year, while the S&P 500 experienced its best quarter since 2019.

But Mattia says that diversifying the portfolio into different types of investments such as international stocks, small-cap stocks, and real estate investment trusts (REITs) can not only increase the resilience of the portfolio but also improve its returns.

An analysis report released by Morgan Stanley Capital International last year shows that over a 15-year investment period, small-cap stocks around the world have outperformed large-cap stocks 90% of the time.

More specifically, the MSCI Global Small Cap Index has an annualized excess return of 2.69% since 1998, higher than its global large-cap index.

Mattia says that although the current valuation of the U.S. stock market may be high, market timing is very challenging.

She adds that for long-term investors, continuing to invest in market cycles will bring better results than staying away from the market due to current high valuations.

For young investors who hope to put their money into many years and adapt to different market cycles, Lineberger points out that total market funds are a good choice for them, as these funds aim to track the trend of the entire stock market and eliminate the uncertainty in investment.

Lineberger adds, "You don't know whether the market performance comes from small-cap, mid-cap, or large-cap stocks."

Having a total market fund means you give yourself the greatest possibility of investing in companies that perform well.