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Investing Tips for College Students?
Posted by
Cliff
on Wed Jul 26, 2006 09:35 PM
from the for-the-financially-minded-among-us dept.
from the for-the-financially-minded-among-us dept.
GenKreton asks: "I am a rising junior in college and decided to take out loans to cover all my costs so I could graduate with money in the bank. My tuition bill is minimal as I have a nearly full ride, but living is always expensive. With that said, I feel like my thousands sitting in the bank could be doing work for me instead of collecting dust till the day I graduate. I have been researching how I could best invest my money so I have immediate access to it if needed, but still do better than a mere savings account. There seems to be a lot of mixed advice and some obvious scams out there. So I ask Slashdot, what is the best plan for a college student to do with his money?"
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Live frugally first! (Score:5, Informative)
For most folks, I'd have to say mutual funds or real estate right now although the stock market usually performs at about 10% or better depending....
Percentages are misleading... (Score:5, Informative)
Parent
Don't put it in stocks or stock funds (Score:5, Insightful)
This loan money is money you're going to need to repay in a fairly short time, right? The stock market is volatile. When you need the money a year or two years from now, the stock market could be way up from where it is now. It could also be down--possibly by 25% or more. And that's just the market indices. If you invest in individual stocks, rather than index funds or other diversified mutual funds, your investment's value could fluctuate even more.
Better options:
Finally: have you thought about the ethics of using your student loans in this way? Were the loans given to you in order to help you pay for your expenses as a student? Do you think it's okay to ask someone to loan you money for one thing and then use that money for something else? Isn't that a form of lying?
Parent
Re:Live frugally first! (Score:5, Interesting)
Real estate is caught up in a speculative bubble that will probably pop in the next couple years, bringing terrible pain.
http://www.investorsinsight.com/images/otbemail/1
The stock market is highly overvalued. Stocks have only ever been a good buy at PE ratios of about 10 or less. The US market is at about 21, and profits are at record lows as a percentage of GDP. A cursory examination of the equity price cycle says now is a terrible time to buy. The typical bull market lasts about 15 years and the typical bear market lasts almost as long. Stocks went way up in the 15 years leading up to 1965. Then stocks did nothing until the early 80s. Then they shot up for 20 years. We are in a bear market now (inflation adjusted stocks are 20% below the 2000 high and still dropping). The historical pattern suggests stocks might be a good buy around 2015.
The claim of 10% historical returns from the stock market is complete garbage. Nobody invested at an "average" time. People invest over the course of a 45 year career. If you break the last 150 years down into every possible 45 year investing period and then take the median return from all those periods you get a typical return barely better than bonds. The 10% claim is also complete garbage from the get-go because it ignores taxes and fees.
If you want to buy stocks anyway, mutual funds are the worst possible way to do it. Fees and active trading will kill you. Mutual funds are obsolete now that we have ETFs. The advice someone posted elsewhere to consult with a professional is bogus. Professionals will steer you into their comission generating products like mutual funds. You have to research this on your own, and most of the popular literature is basically industry propaganda.
Someone else criticised you for even taking out student loans. They are wrong. Student loans are free money right now, assuming your income is negligible. The interest rate is way below inflation, which is understated by as much as 5%.
My money is on commodities. I think we're on the brink of a 10 fold gain in things like oil, metals, grain, gold etc. All the major currencies are being rapidly debased and an industrializing world is creating materials shortages. The case is so easy to make, while people selling stocks can only cite historical returns.
If I wanted to make a high risk play, as I might if I were in college and just playing with the money, I would short the NASDAQ.
Parent
KingKong's post... (Score:5, Insightful)
I also agree it's probably going to take another few years before stocks are a good investment - say, 2012-2015 - and we're going to need a major market dump before that happens. As one market analyst remarked some 30 years ago "You can't breathe in all the time; at some point, you have to exhale". It's just so with markets - the cycles the poster above referred to are the result of new technologies changing societies and markets, and then a sort of 'resting period' while they digest all those changes. The bull market from 1916-1929? Society was investing in cars, telephones, and radio. A bear market while that was digested. The bull market from 1949-1966? Television, jet travel, mainframe computing. Then a pause from 1966 to 1982 while they were digested. The bull market from 1982 to 2000? PC's, internet, cheap telecoms, broadband cable, etc., etc. We're still digesting those changes.
My guess is the next boom will be fueled by major advances in biotechnology, natural language speech recognition and synthesis, and, of course, pr0n and anally implanted RFID's.
Parent
Re:Live frugally first! (Score:5, Insightful)
Don't forget, with loans, you are going to come out of school with debt. Why not plan to have some cash on hand to start paying that off early? Trust me, paying that debt off should be priority #1.
Going back to point #1 - I will say that this applies to just about anyone. If you have reserve cash - hang on to it, you never know if you will need it in a snap. To many of my friends had a glob of cash from different things (insurance payoffs, VC money, loans money) and spent it too fast, and found themselves high and dry when it counted.
RonB
Parent
Re:Now is the best time to invest! (Score:5, Interesting)
Parent
Talk to the pros (Score:4, Insightful)
Go ask a financial professional. There are tons that give free first time consultations.
Re:Talk to the pros (Score:5, Informative)
I recommend getting an online brokerage account, and investing in an index ETF (many boring technical reasons for this). The one I like most is SPY (the spyder fund), which tracks the SP500. Once you have invested whatever you want, ignore the money. It will go up, it will go down - but over 20-30 years it is a very safe investment.
For every $1 invested:
after 10 years, you have $2.60
after 20 years, you have $6.70
after 40 years, you have $45
after 55 years, you have $190
So assuming that you are 20 and retiring at 75, every dollar you invest now is about $200 at retirement (or, seen another way it is $20 per year at retirement). Invest early! (And ignore what people say about the markets - it is a proven fact that you cannot make money listening to others, except for insider trading...)
Parent
Good advice: (Score:5, Funny)
Get rid of the savings account and do not invest: this way you can file 1040EZ instead of 1040 to the INS; as a college student this will save you money.
Start your own business and become a consultant. Claim beer etc. as a business expense.
Buy gold. That keeps going up, plus will keep its value when the Revolution comes.
Get a PhD in chemical engineering; you will be raking in 250k+/year if you are any good.
Become a Canadian citizen; with your IQ you will qualify for disability payments.
Parent
Reality check (Score:5, Funny)
Pay down any credit or loans. (Score:5, Insightful)
Loan type? Interest rate? Payoff schedule? (Score:5, Insightful)
The biggest issue in my mind is that by taking out loans, you now owe interest. Depending on what kind of loans they are, the interest rates, and the repayment schedules, this may not be the best thing to do. In the long term, unless you're able to achieve a higher rate of return on any investment you find, you'll be losing money.
If you financial situation is stable, and you have some sort of fallback plan (i.e. family), or you can look forward to finding a good job when you graduate, the best thing to do may be to just pay off those loans right now.
Get out of debt (Score:5, Insightful)
Then you borrowed money to invest and you don't even know how to invest. Think about that for another minute.
Give the money back to the bank, pay your stupid tax, and go to DaveRamsey.com and get My Total Money Makeover and learn how to use money.
Or, continue to be financially brainless and wander around borrowing money for no good reason and wonder why you retire broke and bitch about Social Insecurity.
Re:Get out of debt (Score:5, Insightful)
1) My loans aren't gaining interest now, the federal government is handling that for me.
2) I want options when I graduate to move to where I need to or whatever. I don't want to live in my parents' basement till I am 35.
Parent
Re:Get out of debt (Score:5, Insightful)
2) I want options when I graduate to move to where I need to or whatever. I don't want to live in my parents' basement till I am 35.
When I graduated from college I got a job and moved out of my parents' house in 6 months. If I understand you correctly:
1) You're borrowing money you don't need from the taxpayers so you won't have to do that, and
2) You're asking those same people to tell you how to make more money.
Suck it.
Parent
Not rocket science (Score:4, Insightful)
One concept I've heard of that I liked combines liquidity (access to money) with a high return. Say you've got $5000 you can put away. Divide it by five and put $1000 each into a 1-, 2-, 3-, 4- and 5-year Certificate of Deposit (CD). At the end of the first year, when the first CD matures, roll that into a 5-year CD. (The longer the time, the higher the interest rate is you earn, usually). Lather, rinse, repeat. Every year, 20% of your investment becomes available without penalty and you're earning a high rate of return on your money due to the longer term and interest rate averaging over the time period.
That, or find a financial advisor you can trust. A good one will value your relationship and look forward to making you money for many years. A bad one will want you to trade stuff in your account often (earning them high commissions) and leaving you in the poorhouse.
That, or invest in mutual funds that cover a lot of type of investments: some index funds, some international/European funds, a few bonds here and there. It's very easy to avoid scams and beat your savings account rate. Optimizing that is what is a bit trickier.
Sounds crazy but... (Score:5, Funny)
I'll let you know how it turns out!
Believe it or not it's illegal (Score:5, Interesting)
HELP NEEDED TRANSFERRING FUNDS (Score:5, Funny)
THE MONEY IS IN A BANK IN RUSSIA. UNFORTUNATELY, MY COUNTRY IS CURRENTLY FIGHTING WITH RUSSIA SO I CAN DO NO BUSINESS WITH THEM UNLESS I PUT SOME MONEY DOWN FIRST. I AM WRITING TO YOU HOPING YOU WILL HELP ME OUT. I NEED FOUR THOUSANDS DOLLARS TO PAY BEFORE I GET THE 30 OR 40 MILLION. I AM A HONORABLE MAN YOU HAVE MY WORD THAT I WILL PAY YOU BACK VERY HANDSOMELY. IN ABOUT A MONTH A LARGE CUT WILL BE WIRED TO YOUR PERSONAL ACCOUNT. PLEASE INCLUDE YOUR BANK ACCOUNT NUMBER SO I CAN DO THIS. PLEASE SEND MONEY AND INFORMATION RIGHT AWAY AS CONDITIONS IN OUR COUNTRY ARE WORSEN.
THANK YOU VERY MUCH FOR YOUR KINDNESS IT WILL BE REPAID.
YOUR TRULY
XABBU UGABE
My Advice (Score:5, Insightful)
Here's some brief advice based on my own experiences... I don't have the willpower to go into lengthy explanations for each point, so the first thing that I can recommend is that you start by doing some background reading. (Also, I'm skipping all of the mundane advice like "live frugally" because you've probably heard most of it before, and you want a non-bullshit answer.)
0) Pick up the "Intelligent Investor" by Graham, revised edition with commentary by Zweig. Then, read everything at: http://www.bylo.org./ [www.bylo.org] When done, read everything at: http://www.ndir.com./ [www.ndir.com] Once you have established this basis, you will probably understand & agree with my following comments more closely.
1) Pay off your debts first. Do not invest money while you still have debt -- paying off a 19.75% credit card balance will reap you more money than any average investment. Let me repeat that, because most people are retards and don't get this point. Do not put a cent of money into a mutual fund or stock until your debt level equals $0.00. Capiche?
2) Open an ING Direct savings account. It's free, it pays high interest, and it's secure. (I've been a customer with the Canadian version of ING Direct for more than 7 years.) Keep your spare cash there. This includes any money that you make on co-op work terms (or summer jobs, etc.).
3) Build up a sufficient supply of cash in your ING account -- enough to pay for the next 2-4 terms (or whatever you feel comfortable with). This is your "margin of safety" cash -- don't touch it. It's used in the event that you lose your job, crash your car, etc.
4) At this point, you have no debt, and you have reached your "margin of safety" amount. Once you have built up an additional $3k to $5k on top of your margin of safety, open up a discount brokerage account (e.g., E-Trade).
5) Now, start to build a "couch potato portfolio". Buy an S&P500 ETF (called a "SPY"der, in the States) from iUnits/iShares. (I recommend waiting until you have $3k to $5k to minimize the effect of brokerage commissions, as a percentage of the amount invested.)
6) Every subsequent $3k to $5k that you save is then used to build up a diversified portfolio of (a total of) 3 or 4 ETFs covering the S&P500, the NASDAQ, MSCI EAFE, and possibly a Japaense/European/Canadian index. Over time (as the evidence suggested at http://www.bylo.org/ [bylo.org] would suggest), your low-cost ETF portfolio will outperform a vast majority of actively-managed mutual funds, and it requires relatively little maintenance on your part. This is exactly the kind of portfolio you want to build as a student -- you want an investment platform that you can put on "cruise control" while you focus on more important things (like studying, partying, getting a girlfriend/boyfriend, etc.).
By the time you're ready to move on to more advanced stock/bond investing, you will probably know that there are better forums for these kinds of questions, and you will go there. Good luck.
Re:My Advice (Score:5, Informative)
I've also dealt with ING Direct for a number years (and in real US dollars even!) and they were the first thing that came to my mind as well for the situation asked about here. You can move money in and out of the account as fast as your bank will clear the transactions, making it fine for use as backup cash, and the interest rates soundly thrash most other savings vehicles.
Comments about clearing debt and such before investing are spot on, but I think the timeline outlined here is a little conversative. It's not that hard to extract money from the stock market when it's in a liquid stock like SPY, where you don't lose much in the buy/sell spread to enter and exit the transaction. If you needed emergency money, you can get it out of a good brokerage account in a few days by closing your position and wiring/ACH'ing the proceeds out. As such, waiting until you have lots of money on top of a large safety net may not be necessary for those willing to tolerate some additional risk. If your debts are paid off, you have a full term worth of cash, and another $3K on top of that, putting that $3K into a relatively safe stock market investment instead of a savings account would be aggressive, but not crazy. Stashing 2-4 terms worth of money probably makes sense to a really long-term student like our poster here, students doing a shorter tour of duty will have graduated before they meet that standard.
That said, I'm a little torn on the subject of investing in ETFs like SPY right now though. If this were early 2003, where the stock market was fairly priced by historical standards, then I'd say jump on that. But the current S&P is showing a lot of the signs of a peaked market right now; it's been going straight up for over three years, it's already recaptured most of the lost ground from the
It's also worth noting that while Graham's "Intelligent Investor" is a great book, it's hard to follow some of its principles while trading ETFs. Compared to the relatively easy way you can characterize the intrinsic value of a regular stock, it's not as clear what the intrinsic value of a an ETF like SPY is.
Parent
Re: What a crock of self-important crap (Score:5, Funny)
That's almost universal on Ask Slashdot articles. Most of the "questions" should be posted to Brag on Slashdot instead.
Fertile ground for parody, though:
"I've been sleeping with seven beautiful women for the past five years, but now some of them are hinting that they expect me to marry them. Are there any good IT jobs in Utah?"
"My IQ is so high that I have trouble comunicating my ideas to ordonary programmars. Is there an open source tool to help me?"
"I invented an incredibly programming tool, but my boss won't make everyone use it. Please tell him he's wrong."
etc...
Parent
Re:What a crock of self-important crap (Score:5, Funny)
You're doing it wrong!
Go to all your classes, do all your assignments, get Bs.
That leaves lots of time for partying.
Parent
Re:Mutual fund (Score:5, Informative)
I.e., the banks will get you to pay them (indirectly) a commission, so you start out a few percent poorer than when you walked in the door, and they don't really care if the fund performs well or not, so who knows if you'll ever make that back or when. Or they'll sell you some stupid annuity with a multi-year lock-in. Either way, you'll almost certainly pay them some nice percentage for lousy advice.
This guy will need to pay back his loans (which, most probably, were only authorized for qualified educational expenses, in order to qualify for various governmental guarantees needed to get the interest rate for student loans, even in the absence of a good credit rating, but that's a whole other line of criticism) within six months or so after graduation, or at least will start racking up interest unless he keeps in school or makes some other sacrifice that persuades the goverment to keep paying the interest for him. At which point, any volatile investment has a good chance to be down when the loan payments start.
This guy should not have maxed out his student loan debt if he didn't need to. Using them to invest on margin, even if the interest for now is zero percent, is idiotic, except in something liquid and low-risk.
Parent