How Not to Move Back in With Your Parents
Financial Literacy 101 Podcast Episodes
Basics of Investing
Listen to the Podcast
Pete and Alex talk about what information you need to know about investing as well as when the right time to start investing is.
Read the Show Notes
Investing always generates a buzz. It has been one of the most asked about topics by students since our office was created. It’s such an intriguing topic because it’s the one where people can use their existing money and turn it into more money. Talking about investing is always met such optimism, as though it’s a sure thing that their investments will go up. Pete does mention in the podcast that the market does trend upwards, but he also implies caution in the discussion and suggests that you satisfy your savings needs before turning to investing.
Investing is not a short-term thing. It is designed for you to put money away that can one day be used for retirement or a major purchase (college, home, health care need, etc.,). When you do choose to start your investment adventure, do not expect to gain lots of money in a short amount of time. Chances are that you will not find the next Apple when you invest; even if you did, the amount of money you have to invest will probably not create a large monetary return, relatively speaking. If you invested $1000 in Apple at the beginning of October 2009, you would have been able to buy 37 shares ($26.71/share). At the end of September 2014, the price was $100.75; meaning that in 5 years, you would have made a profit of over $2,700. While that is a very nice return, it means you made a return of a little over $500/year for 5 years. That is not a return on which you can retire. Also, Apple has had about as high a return as you can find, so this rate of return is about as good as you could hope for. The bottom line is that you shouldn’t get into investing as a college student if your primary reason for doing so is because you think you’ll make tons of money.
Perhaps a more important realization is that you should avoid investing unless you have an emergency fund already established in your savings account. As Pete and Alex discuss, a savings account is needed to take care of emergencies and other short-term monetary needs. There is no reason for you to have long-term savings funds (investments) unless you’ve solidified your short-term position.
But when you are ready to invest, whether that’s in college, right after college, or 30 years from now, it's extremely important to know that you must diversify your portfolio. You must make sure that you are not putting all of your money into one stock or bond, or investing in multiple entities in the same industry, because doing so increases the risk of your portfolio. Spreading things around helps prevent you from losing your investment rapidly should the company and/or industry that you’ve invested in collapse. If the market does in fact trend upward, then diversifying your portfolio should result in a steady increase over the life of your investment. Of course, this means that you have to be patient and understand that you’re not going to become a millionaire overnight.
Finally, even if you don’t chose to invest on your own, make sure to invest in whatever retirement plan your (future) employer offers. While it may seem strange to set aside money for retirement while you’re in your 20s, the power of compound interest is astounding and could be your ticket to a comfortable retirement. If you don’t believe us, check out this investor calculator that should give you an idea as to how your money can grow (http://www.investor.gov/tools/calculators/compound-interest-calculator#.VCjWJy5dUfI). We also recommend trying the calculator again and taking 5 years off the life of the investment as it will show you how much money you stand to lose by not investing early.
To get you started, the IU MoneySmarts Team is here to help you set up your budget and get you to start saving so you can get to investing sooner. Sadly, we are not licensed to provide any specific investment advice, but there are always financial advisors you can contact to help you get started. Good luck!