Published March 30, 2011
As a current student or recent college graduate, investing in the stock market might not be the No.1 item on your to-do list right now. A semester workload or securing a full-time job provides enough pressure without adding the volatility of Wall Street to the mix.
Tim Olsen, a senior finance major at LSU and author of The Teenage Investor and the financial blog GenWiseInvestor, says that college kids should take a simple, but well-informed approach to the world of investing.
“At this age, time is a huge constraint for us because we’re dealing with schoolwork, tests, quizzes, going out and doing things with friends,” Olsen says. “A lot of people [think] it’s really time consuming and a lot of us don’t understand the big things of finance in terms of a balance sheet, and the actual financial companies.”
Investing isn’t as time consuming as it used to be, and while most students aren’t flush with cash, they can take the reins of their financial future early through smart investment choices.
“[If] you put [investing] off and the more focused you are in consumption, spending and accumulating debt, you’re putting off the development of a good life-long habit,” says Eric Tyson, author of Investing for Dummies.
Can I Afford to Invest?
Typically, college students and recent graduates' living costs outweigh their income.
Tyson suggests recent graduates maintain a lean lifestyle to shore up cash at the end of each month to save and invest. Before jumping into an investment, the experts agree that young adults should have adequate savings to cover an emergency or unexpected expense.
Before entering the investment world, Olsen suggests that young investors use an investment calculator to plug in different interest rates, time periods, and amounts of money to see what goals are feasible.
“If you play around with numbers, it’s really impressive in seeing the returns you can earn,” he says.
Pick Your Investment Method Wisely
There are several factors to consider before taking on the financial responsibilities of a young investor.
Prior to plunking down money in just any investment vehicle, youthful investors need to understand the risks involved with different tools and how time is associated with the level of risk, says Jonathan Bernstein, financial advisor for Altfest Personal Wealth Management.
“One should figure out how long until invested funds will be needed and then research what sort of investments are appropriate, given the time period and one’s risk tolerance,” he says.
Tyson explains that investment strategies should depend on what the money will be used for along with the investor’s financial situation and risk preferences.
“If the first money you’re putting away is for emergency purposes, then you don’t want to put that into something that is going to be real volatile or has a great chance of going down significantly in value,” he says. “On the other hand, let’s say you’re putting a small amount of money away each year into a retirement type account--if that money is going to be in there for many years, you could be more aggressive with that money.”
Once an investor has decided on an approach, now’s the time to consider how diversified the portfolio should be to meet these goals.
Time is on Your Side
Young investors have time on their side, and allows them to plan and adjust accordingly throughout their investment period.
“The longer one’s time horizon, the longer one has to recover from negative or lower than expected performance,” says Bernstein.
As we know, time is a major player in the magic of compound interest. Tyson explains that investors don’t have to have super high returns to create a sizable nest egg in the future, and that the key is to systematically put money away.
“The compounding of the investment returns is huge when you’re looking at decades rather than months or years,” he says.
Planning for Retirement
For college-aged people, retirement might seem like a lifetime away, but the experts say it is never too early to start planning.
Learning about the tax advantages of investment vehicles like IRAs and 401(k) plans is a good first step in understanding how to plan for retirement.
“Even if one does not have enough money to cover living expenses and also to save for retirement, becoming educated about retirement planning and investment options is a great head start,” says Bernstein. “Once cash flow increases, [you] can get started saving and investing a lot faster, having already done much of the needed self-education.”
Young investors don’t need to save nearly as large of a percentage of their income each year if they get a head start, says Tyson.
“Young people [might] only need to save 6-8% of annual income each year [as opposed to 10-12%] to be able to accomplish a given retirement goal,” he says. “I wouldn’t go overboard with it, but it certainly is a reasonable thing to begin to think about.”
Enter the Investment World Slowly
Like every investor, young adults should research a potential investment thoroughly, but learning from mistakes is an important part of any investor’s toolkit.
“A young investor, having less experience, will have less real-life guidance and may be less likely to know if he or she is taking an inappropriate risk or has an inadequately diversified portfolio,” he says.
However, Olsen warns the search for instant gratification can lead students looking for higher returns in a short time period instead of long-term benefits.
“For every success story, there are thousands of other people who lost their shirts, who lost retirement savings, lost whatever they started with,” he says.
Before committing to an investment company or vehicle, do research and get educated about investments or products to avoid. Bernstein advises to meet with a fee-only financial advisor; fees should always be discussed before investing and know how the company or advisors are compensated.
Tyson says investors can certainly listen to other people’s advice, but check it with independent resources and research.
“Take your time and don’t rush into investing your money because you could end up regretting it,” he cautions.