20-year-old has focus on oil and gas stocks

JACK'S £5,000 PORTFOLIO

LAST THREE TRADES

Dragon Oil (buy), Ashtead Group (buy), Amerisur Resources (buy)

WATCHLIST

FTSE 100 tracker fund, Genel Energy (GENL)

Chris Dillow, the Investors Chronicle's economist says:

Never mind the composition of this portfolio. There's one fantastic thing you've got right - the fact that you're investing at all at such an early age. This alone generates huge returns, thanks to the power of compounding.

If you invest a lump sum of £1,000 and can earn a return of 5 per cent per year - a reasonable expectation for equities - then you'll have £3,225 after 25 years. After 30 years, however, you'll have £4,116. That's a difference of £891. In effect, if you start investing five years earlier than your contemporaries, you'll earn 89 per cent on your £1,000 that they'll miss. In this sense, you stand to make decent money unless something goes badly wrong.

In this context, many readers might question your big exposure to oil stocks. I'm not sure this is so silly, however. For one thing, it's not at all obvious that the biggest danger to these - a continued slide in oil prices - will actually continue; it's possible that sub-$50 per barrel oil prices will cause a withdrawal of supply and stabilisation of prices. And for another thing, your exposure to them is diversified by exposure to mid-cap stocks, many of which should benefit from lower oil prices: I suspect the market is under-rating these gains.

Instead, my quibble is with your preference for good dividend payers. A high dividend yield is usually a sign of one of two things: either the market believes a stock is unusually risky; or it believes the stock offers little long-term growth. Investors need a high yield to compensate for these drawbacks. This alerts us to the dangers in such stocks. One is that their risks might materialise. One of these is cyclical risk. Value stocks tend to do badly in economic downturns. If the economy slows down by more than expected this year, they might suffer. The other is that, in some cases, investors might not be pessimistic enough about their poor growth prospects and so their prices could fall further. Tesco (TSCO) and J Sainsbury (SBRY) were on decent yields in the summer, for example - but that didn't stop them falling further.

Yes, there are some cases where a high yield is a sign that investors are wrongly pessimistic about growth. But such cases are hard to spot.

There's another issue here: should young people be holding specific stocks at all? Part of me thinks not. Even big and apparently healthy companies have a high death rate, which means that you will outlive many of your investments: look at a list of the members of the FTSE 100 30 years ago, and ask yourself how many you recognise. This argues for investing in tracker funds. They back the field rather than any particular horse, and save you the risk of holding stocks which will at some point in your investing career do very badly.

But there's a case against simply holding trackers. Investing in specific companies is (or should be) a learning experience. You learn not just what drives individual share prices but also about yourself: what sort of mistakes do you make? Such learning can be great preparation not just for your future investing but for life: the errors of judgement we make in investing often have counterparts in other aspects of our life: behavioural finance is simply the application of wider research into cognitive biases.

There is, though, a danger here. It's that you might get discouraged by losses and give up investing, thus depriving yourself of the benefits of compounding. This would be an expensive mistake. To guard against it, remember that any losses you make now will be small compared to your future investments. In this sense, you can afford some mistakes - as long as you avoid the biggest one, which would be to give up.

Adrian Lowcock, head of investing at AXA Wealth, says:

You have made a good start by already saving for your future at 20. You are aware of your personal situation and that you have time on your side. You are therefore willing to take a bit more risk than other investors.

You are saving for the long term. I suggest you firstly really focus on your objectives and set yourself some specific targets and timescales. For example, are you looking to save for a deposit for a house or are you looking further ahead?

The first thing you should consider doing is using your individual savings account (Isa) allowance. At this age I think an Isa is more suitable than a pension for you. The contributions will grow free of any additional tax but most importantly you will be able access the money if necessary, something you cannot do with a pension. Although the tax benefits of an Isa may not fully materialise for a few years it is a good a habit to get into and helps future proof your portfolio from tax.

Given the current size of the portfolio, your investments all constitute small holdings. This is not a problem for the funds, but for individual shares dealing costs are likely to have a significant impact on the potential returns. This means that your investments have to work even harder for you to make a good return. Generally speaking I would not recommend investing in individual shares unless you are willing and able to put £2,000 into each company, this minimises the impact of dealing costs.

The second issue with individual shares is the risk they present, because of the size of the portfolio even a small holding will constitute a significant proportion of the portfolio. The portfolio performance is being driven by the movement of a few shares. Individual shares are more volatile than funds which invest in many shares to spread company specific risk.

Having an interest, such as the oil sector in your case, is a good way to start investing. However, it comes with its own risks as recent falls in the oil price will prove. It is important you ensure the portfolio does not become too dependent on oil stocks. They can be very volatile, especially oil exploration companies and frequently disappoint investors. Being diversified is critical to getting a good performing portfolio.

As you are relatively new to investing and starting your portfolio, I don't suggest you sell your individual company shares - timing is likely to be poor. Instead, you should use the opportunity to study the companies, learn how to read their balance sheets, company reports and develop your stock picking skills. As you add money to your portfolio these holdings will become relatively smaller. When you do sell any companies you should put the money back into an Isa wrapper.

I suggest you complement the existing portfolio by introducing several long-term core funds with the extra £5,000. Put this in an Isa and invest in a couple of core funds which can be added to over the years. I suggest two core funds, firstly, Threadneedle Global Select (GB00B0ZWYQ43) managed by William Davies. Mr Davies believes stockpicking is the main driver of investment returns, but combines an assessment of the wider economic environment to provide perspective. The global scope provides you with a good core fund. To this I would add M&G Global Dividend (GB00B46J9127), another global fund but this time the focus is on growing dividends. Manager Stuart Rhodes is a patient long-term high conviction manager who focuses on sustainable dividends.