Investing Tips for College Students? 740
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?"
Believe it or not it's illegal (Score:5, Interesting)
Re:Mutual fund (Score:2, Interesting)
Though you can only "borrow" up to about 60% and if your fund drops, they will call the margin and sell you out to cover the loan (but in this case, the difference between where you bought into the market and where you got sold out would be a tax deduction). But that's better than having just pissed away all the money in the first place.
What you want are U.S. Treasury Bonds (Score:3, Interesting)
First, you should buy a book on investing. Not some get rich quick book, but a real investing book. I have no suggestions here.
Second, what you seem to be looking for is a nearly 0 risk investment that yields better than a bad savings account. You should contemplate US treasury bonds.
Right now they yield around 5%. These bonds are typically considered "risk free" in that, as long as the U.S. government is around, they will print you dollars to pay you back. Of course, if there's lots of inflation that money they print for you will buy a lot less, but then again, you have the same exact problem with your savings account. You can do practically the same thing with a bank issued CD, but treasury bonds are fungible on the open market, unlike CDs. That means, if you have a 5 year note treasury bond, you can sell it on the open market before it matures, or you can wait for it to mature. With a CD you will pay a penalty (which will negate the benefit of having had it in a CD) if you try to cash out early.
Last I checked, you can buy the bonds in $1000 lots from the fed government. In short, you buy the bond for some amount less than the face value, (e.g. $950) and then in a defined amount of time (based on the maturity you select (3 month, 6 month, 2 year, 5 year, 30 year) it will pay you the face value ($1000). You should check out the Treasury website. This is extremely easy for US citizens, and I think it's still doable for those outside the US.
Either of these options though is substantially safer than investing in stocks, mutual funds, private bonds, etc. Of course, as always, you should be wary of what you read on a message board, and no investment is 100% safe, and that includes savings accounts. I'm not a professional and I could be wrong about anything I just said.
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.
Re:Live frugally first! (Score:1, Interesting)
Re:Don't put it in stocks or stock funds (Score:3, Interesting)
Re:Live frugally first! (Score:3, Interesting)
Re:Get out of debt (Score:3, Interesting)
So, you know, get a job. If you don't have a job, then you shouldn't waste your savings just to move out of your parent's basement. The goal isn't to move out of your parent's basement, the goal is to be a contributing member of society. Manage that and moving out of the basement should follow. The shame is in living in your parent's basement because you blow all your income on booze and night clubs and shit, or because you can't be bothered to find (and go to) work. If you've landed a job and are working hard and simply cannot afford to move out, or if you're in an economically depressed area and there simply aren't any jobs
-scott
If you don't want to lose yuor money, be smart. (Score:3, Interesting)
There are some companies which are guarenteed to make money simply because the federal government spends billions of year giving money to companies to defend the country. You can bet phone companies won't be losing money, banks won't be losing money, most hedge funds wont lose money.
I can always be wrong, but if I had the money, I'd invest in Haliburton.
Buy and Sell (Score:3, Interesting)
Re:Now is the best time to invest! (Score:5, Interesting)
Re:Buy a house (Score:3, Interesting)
Incorrect. Purchasing is usually less expensive then renting. However in some markets properties are renting at an effective loss (see sibling). Many property owners are living the property ownership myth and haven't done the math. Purchasing also increases risk (i.e. the roof suddenly needs replaceing).
Most of North America is in the midst of a housing bubble. Babyboomers are already looking to sell their large homes for smaller ones so that they can use the equity to retire (travel, etc). This will soften the housing market. While a total collapse in the next decade is unlikely (but not impossible) buying property as a form of investment is foolish. For most people who do not wish to make property investment a full time job, a simple money market fund is almost certainly a better investment: There is less risk, and the short term returns are often similar.
No. Purchasing may be a better choice. What is the deffinition of better? Will purchasing save money? What is the risk of purchasing versus an insured investment? Will the potential home owner have the time and money to maintain the property? This is a complex equation with many inputs. For some owning is far and away a better choice. For others renting may be a better choice.
Even in terms of clear dollars renting may be be a financially better option. Saving up for a larger down payment may be better option then buying today. Calculating these numbers to determine the best time to buy is not trivial and requires a number of assumptions and flat out guesses.
Home ownership as an investment is a terrible myth. Paying a mortgage versus paying rent is often financially better. However simple home ownership versus renting is not clear cut. There are many costs associated with owning a home from the manageble, predictable costs such as taxes, to large, unexpected costs such as major repairs. There are quality of life benefits to owning your own home, but quality of life does not translate into money.
Owning and manageing a number of properties as a full time job is a different matter. That can and often does translate into real wealth.
Re:If you don't want to lose your money, be smart. (Score:3, Interesting)
What about the opposite? Surely there are some companies that are good investments AND don't leave you with a guilty conscience from sponsoring people that are profitting on the misery of others. (Or am I living in la-la-land again?
Five Things (Score:3, Interesting)
Re:Ethics of student loans (Score:1, Interesting)
> 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?
Actually, he is using the money for exactly what a student loan is for: to pay for living expenses while he is a student. He is going to use his savings for the investments or whatnot.
There are many safeguards in the student loan program to prevent abuse of this sort. First, student loans are a form of financial aid. As such, if someone has too many assets, they will not qualify. (Referring to federally subsidized student loans here.) Second, you cannot receive more financial aid than the official cost of schooling as determined by the college. So he is not going to borrow an excess and bank the difference.
frugality, houses, long & short investments, R (Score:3, Interesting)
1. I agree that living frugally is paramount. Living frugally trumps the advantages of buying a house (unless you're going to put a lot of labor into fixing up the house) This means if you can find a house as small/cheap(#2) as your apartment or find enough roommates to make it so then it's often a great idea, but unless you can count on lots of long-term appreciation don't buy a bigger house than you need.
2. However, if you CAN find a cheap enough place, note that: the principle part of your payment you're investing in the long-term, so don't compare that part to your mortgage and you get a tax deduction for the entire amount of mortgage interest, so reduce that part by your taxes (and you won't pay gains on the first $250,000 of profit, either).
So my rule of thumb is that if your 30-year mortgage, before tax advantages is only 25% more than your rent it's probably a good deal. This does not assume any significant appreciation, but it doesn't apply in a town that's dying or if you're in a coastal city right now and there really is a huge housing crash.
Also if you HAVE any equity in your house when you buy it and have good credit you can lock-in a home equity line of credit, not borrow from it, and have a guaranteed credit reserve at minimal or no cost.
3. I'm going to arbitrarily define a long-term investment as one where you can reasonably guarantee you won't need the money for 5 years. Generally I wouldn't get into the stock market without that kind of horizon, which I don't think you have now. Because a volatile investment can go down with little reason, and often if it goes down without a great reason the right answer is to hang onto it. So don't do this unless you're sure you have enough of a liquid reserve and then you have maybe twice that
4. However, if you want the short version of doing pretty well with relatively low risk in stocks go to fool.com If you want the shorter version: buy S&P500 and Russell index funds. Generally avoid most mutual funds.
5. There are three basic strategies I'd address to having available, relatively short-term money. How much of it does depend on whether you have the bank of Mom and Dad for a really big emergency...
And really it's a tiering process... you should have SOME very liquid cash, some that's a little less liquid, etc.
One option is certainly a money market. Another is a short-term CD. You might look into some treasury securities.
6. A technique for investing in vehicles that have a slightly longer term than you like is to invest, say 1/4 of your cash in a 3 month CD, then in a month invest another quarter and in two months another. (Leaving 1/4 as cash) Then everytime a CD matures you can roll it into another (many banks will do this automatically) but at any given moment you have to wait no longer than 1 month to get your money.
7. Roth IRAs. If your cash now is from actual earned (taxable) income, you are probably eligible for a Roth. And if you are, you should be putting money in it up to your income or the Roth cap. Things to know:
A Roth is a tax designation, NOT a vehicle. So you can have a "Roth savings account" or a "Roth CD" (but you can't mix it with your other money, of course)
Because you contributed after-tax money to the Roth, you can generally withdraw anything up to the entire amount you contributed without penalty*. (You can't ever withdraw the INTEREST until your retire, though) This makes a Roth unique among retirement tax options in that it can double as a liquid reserve (if it's in a liquid vehicle)
*(You still don't especially WANT to withdraw it, because what you can't do is ever put that money back into the Roth. If you withdraw it you are essentially in the same position as having never put it in, but because there are caps on per-year Roth contributions there's a big incentive to start early and keep contributing.)
What is it with you DR nuts? (Score:3, Interesting)
NO, do not cut up all of your credit cards.
NO, do not avoid loans like the plague.
Here's where his philosphy falls flat: Many insurance companies and all financial institutions need a FICO credit score to put in their system so they can evaluate you and produce a rate. If you don't have a credit score, you may as well have a 400 (bottom of the barrel). Keep two credit cards open, use them regularly (gas, groceries) and pay them off each month.
If you make a big purchase (house, car, student loan) get a low interest loan. You can pay it off quicker than necessary, but make sure it's on the books for at least a year. Don't want a mortgage and have the cash? Get a 5 year balloon an put the cash in a CD - the rates should cancel, or you'll end up a couple bucks ahead, and it'll look great on your credit report.
Remember, if you're not a multi-millionaire with cash-safe investments, you're going to need financial help at some time. Suprise medical costs can bury you financially, as can possible legal action. Don't get caught paying two or three times the going interest rate because you wanted to be "Dave Ramsey Debt Free". I've got news for you - if you pay your CC every month, and have more cash in the bank than you owe on your house, you're still debt free.
Re:Live frugally first! (Score:3, Interesting)
"Real estate, mutual funds, and the stock market are the worst possible investments you could make right now."
Ummm.. you are aware of the fact that there are mutual funds that invest in bonds, TIPs or fixed assets, yes? Not all mutual funds invest in stocks.
"If you want to buy stocks anyway, mutual funds are the worst possible way to do it. Fees and active trading will kill you."
Now, I don't have anything against ETFs, but ETFs are not quite mature enough to have products in every nitch. Futhermore if you want someone to actively manage your account, ETF's won't do it for you, and mutual funds would be the way to go. If the concern regarding mutual funds are high fees, then go with Vanguard, which charges a whole 1/3 of 1% per year on average. A cost that hardly breaks the bank to have someone manage your funds. If actively trading, and ringing up short-term gains and losses are the concern, you could find specialized mutual funds that invest long term and are specifically designed to avoid short term gains and the taxation that accompanies it. I would not recommend investing directly into stocks, unless you are investing into a number of diversified companies to reduce risk.
Both of the parent's ideas on how to play the market (commodities and shorting NASDAQ) are high risk propositions that is not suitable for short-term investing. Furthermore, the parent stated that he is not bearish on stocks because they are at the end of a bull market, yet recommends commodities that, by most measures, is on the tail of one of the largest bull markets it has ever had.
Financial Professionals are just like any other business. Some are crap and charge far to much, and some provide solid advice at reasonable cost. Making generalizations regarding financial professionals is just as silly as making generalizations about doctors, lawyers or mechanics. Some screw you, and some provide good service for the cost.
For the record, as the fed slows raising interest rates, the bond market is going to do very well. I personally recommend investing in a broad basket of bonds, from treasury bills to high-yield. The best way to do this is to pick up some bond ETFs or a multi-sector low cost mutual fund.