The world of investing may seem like a foreign place to many college students. Television analysts and reporters rattle off statistics quickly and use terms that are not everyday English. But once you understand the language and what goes on, you will find the stock market is a fascinating place to make money. Even more, younger investors have a tremendous advantage working in their favor – time.
For beginner investors, stocks are often a good starting point. A stock or a share is an ownership interest in a business. A publicly traded business will use stocks, also called equity, to raise capital. As a shareholder, you own a piece of a business. The reason most first time investors start with stocks is that they are easy to relate to and are widely talked about. Information on stocks and the stock market can be found on TV, in newspapers such as The Wall Street Journal, in company filings that can be found on www.sec.gov, at the SMU Cox Business Library and online.
Paul Vineis, a senior finance major explains, “I invest now because I am just fascinated with capital markets, but also my parents have been very savvy investors and explained the importance of investing to me at an early age.”
Vineis currently invests in a Roth IRA focusing on mutual funds and exchange-traded funds (ETFs), because they are typically less risky than individual stocks.
A Roth IRA is a type of retirement plan. Its main difference from other tax-advantaged retirement plans is that rather than granting a tax break for money placed into the plan, the tax break is granted on the money withdrawn from the plan during retirement. To explain Vineis’s specific investing strategy, ETFs are typically indexed, which means they track a fixed pool of companies such as the S&P 500. The S&P 500 is a basket of 500 companies’ stocks considered to be widely held, and the index is meant to serve as a proxy of the stock market as a whole.
In contrast, a mutual fund is a basket of stocks in which an investor or fund manager chooses which companies and how many shares of each company should be in the fund.
While there are endless investing strategies, Mary Callahan Erdocs, the chief executive officer of JP Morgan Chase Asset Management division, said during the April 23 Texas Wall Street Women “State of the Market” panel discussion in Dallas, “The best investing strategy is to have a balanced portfolio. Don’t let the good stuff and fads run, and don’t sell out when you get nervous about the market.” Essentially, it is good to have a diverse portfolio to protect the investor from a potential downturn in any given investment.
So why would a student want to begin saving and putting money into a retirement plan now versus spending that money on other things more pertinent to college life?
The short answer is compounding. Compounding is the ability to grow an investment by reinvesting the earnings. The magic of compounding allows investors to generate wealth over time, and requires only two things: the reinvestment of earnings and time. A single $10,000 investment at age 20 would yield an additional $60,000 by the time the investor was 60 years old (based on a 5 percent interest rate). That same $10,000 investment made at age 30 would have a yield of about $33,000 by age 60, and made at age 40 would have a yield of only $16,000. The longer money is put to work, the more wealth it can generate in the future.
Robert Puelz, a SMU professor who teaches a personal financial planning course, says that investing while in college may not be for everyone.
“It may not be the better choice to save while young because you have to give up consumption to do it. The advantage of saving while young is that you can invest it, and year-by-year you can create wealth if your investments have proven to be good performers,” sad Puelz.
He continues, “In general, whether to save or not is based on a variety of factors including how long you want to work during your working years, along with other concerns such as life expectancy, a preference for leaving a bequest and the prospects of an inheritance.”
Michael Pittman, a SMU student and financial broker says, “Anyone can be a millionaire with enough time.” He continues, “You don’t have to be an expert to be successful, you just have to know some standard concepts.”
Pittman recommends that students see a financial advisor if they are new to personal finance and investing, or listen to the podcasts of Dave Ramsey, a renowned financial author.
“There really are no downsides to investing early. Yes, the market will always have an innate risk, but the stock market has shown an overall upward slope throughout the years,” explains Pittman.
Investing is a great way to save for the future, as long as you are responsible, committed and disciplined. It doesn’t require a huge up-front investment, and it doesn’t require a lot of time or effort. All it requires is a small tolerance for risk, a dedicated time horizon and an up-front time investment of an hour.