Investing is difficult. There is no easy way to invest money. You can’t just throw some cash at the computer and tell it to buy stock in Google for you. You have to go through a process of picking a full-service or discount broker, decide between a brokerage account or an IRA, figure out what you’d like to invest in, and above all else, have money set aside to actually invest. The smartest way for a college student to invest in the stock market is: 1. The easiest way possible (Again, it’s not easy, but you don’t have to get too in-depth in the specifics because most of it even bores the heck out of me). 2. The investment that needs the least maintenance. College students, and probably everyone else, probably don’t want to sit at their computer all day and day trade, or even think about how their investments are doing for more than once or twice a year. This is actually possible. There is a way to invest your money and forget about it until you feel like you want to check up on it, or add more to your investment (hopefully).
But Why Start Now?
Why not wait until you start having an income? Say, your first job out of college, or when you have your first child? Because compound interest is incredibly powerful the longer you invest, so every day counts. I’ve talked about how much of a difference 4 years can help the value of your retirement fund in the long run in an earlier post and in the example, the student who started at the beginning of his college career ended up with $230,000 more at retirement age than the man who started when he had his first child at 25 years old. The amazing thing is that the student in this example only put in $3,500 more in their account ($500 per year) than the person who started at 25. So if you agree that an extra $230,000 when you retire is worth it by investing $500 a year ($42 a month) until you have a real job, then read on!
Finding a Brokerage Firm
There are two main types of brokerage firms: A full-service broker and a discount broker. A full-service broker gives you a more face-to-face interaction with an actual person and they will probably cater to your needs in a more specific way. A discount broker lets you be your own boss so-to-speak. It gives you the tools you need to make an educated decision, and you can also choose to talk to a representative, but the overall feel is that you do it yourself. The big plus is that a discount broker charges on average 5-10 times less than a full service broker on a commission basis (every time you buy or sell). I recommend the discount broker option for everyone, especially college students. Yes, because it’s much cheaper, but mainly because it is very easy to invest on your own unless you have just received a large windfall of money, then i recommend you get some professional help. I have an account with Schwab and I am really pleased with it. It has a lot of extra features to research what you want to trade, a very simple interface, and very good customer service. The best part is that it’s only $8.95 per trade. Not the cheapest, but not the most expensive either.
Opening a Roth IRA
If you’re planning to put some money away for the long term, I recommend a Roth IRA over a Traditional IRA. See what the difference is here. The short explanation is that if you are a college student, you’re in a lower tax bracket right now, so you save more money in the long run. To open a Roth IRA at Schwab, you need either a $1,000 lump sum to deposit into the account or a $100 monthly transfer. If you don’t have that kind of money, I completely understand. Just know that compound interest is a very powerful thing, and 4 years does make a huge difference. Today can be the day where you take a big step to investing in your future.
What Should College Students Invest In?
The investment everyone should consider in this situation is index funds. Index funds try to copy the Dow Jones, the S&P 500 and others, for a low fee. So instead of looking at the vast amounts of stocks out there that could make or break you, the index fund gives you a consistent gain, just like what the S&P 500 does over 40 years, that’s the % gain that you would make with your index fund investment. Take a look at SWPPX, the Schwab index fund that copies the S&P 500, and also the index fund I invest in. As you can see, it doesn’t give you dramatic gains and losses like a single stock would have, because this fund has 500 companies in it. All of those companies averaged out gives you a small consistent gain over years and years. One major thing that makes index funds better than mutual funds is the expense ratio. Motley Fool Champion Funds lead analyst Shannon Zimmerman says “An expense ratio is the percent of your assets a fund company takes back each year in exchange for its services.” And mutual funds have much higher fees than you would expect. Usually between 1% and 2%. Index funds, especially Schwab index funds, have a much lower fee. For SWPPX, the expense ratio is a measly.09%. What’s worse is that mutual funds don’t do any better than index funds. In fact, they do WORSE. Here is a quote from Payback Time by Phil Town: “A recent Forbes study found that only 4 percent of fund managers beat the market over a fifteen-year period… Only percent of pension funds beat the market over a fifteen-year period, too.” So unless you were in that elite 4%, you could have done better and paid much less by purchasing an index fund that copies the market. Yes, you could try and invest your money in what you think is the next giant company and make it big. You could research the heck out of tons of different companies to see which company has room for growth. This is definitely plausible and many people do it. However, if you want the easiest route, consistent growth in your portfolio, and have a social life, this is the way to do it.
Actionable Item!
Four step plan to automating your investments: 1. Research discount brokerage firms and pick your favorite 2. Set up your Roth IRA 3. Deposit your $1000 into it or set up a monthly transfer of $100. 4. Pick an index fund of your choice! I’d stick with copying one of the most popular funds, like the Dow Jones and the S&P 500.