Many college students have short-term money concerns — paying rent, going out on Saturday night or buying textbooks. Some students however, are focusing on more long-term concerns — buying and selling stocks and investigating bull and bear markets.
Longterm money management is crucial, according to School of Management professor Jeffery Heisler.
“Getting going early is great,” he said. “I’m surprised at how sophisticated some students are.”
Evan Ferrante, a 2001 College of Arts and Sciences graduate, started investing when he was a freshman in college. Acquiring enough money to invest gave Ferrante the incentive to learn more about the stock market. He became “wrapped up in learning how to make [his] money grow,” and got a discount broker to aid him in deciding where to invest.
He invested in 10 different stocks, creating a diverse portfolio. Diversifying a portfolio is encouraged, especially for young investors, because it spreads the risk.
Initially, amidst the Internet stock boom of the mid-’90s, his portfolio was performing well.
“Then, the bubble burst,” Ferrante described. “The value of my shares went way down.”
Though he didn’t experience instant success, Ferrante is glad he gained the experience he did; he intends to continue to invest.
“I’m still involved because I think it’s important to invest while you’re young,” he said. “You can afford to be more aggressive.”
Ryan Totka, founder of CollegeInvestors.com, agreed that young investors can be much more aggressive than older investors. He cited the ease of online investing and the constant availability of investment information as primary factors in this phenomenon.
“As a student, it’s easier to educate yourself,” he said. “You can get any information on the web — real time information.”
This information is vitally important for any potential investor, because lack of knowledge can often hinder success in the stock market, according to Jason Krishnan, president of the Boston University Finance and Investment Club. Luckily, said Krishnan, this information is easy to find.
“What is making it easier for us students to invest is the evolution of financial websites. Today, any student sitting in her dorm room can go online and open a brokerage account and start trading almost immediately. There are so many websites which students can utilize to research the markets and communicate with other investing communities, as well as learn about investing and trading,” he said.
Through this research, students can decide what method of investment is best for them. Many choices exist; some options are safer, while others require more risk-taking.
Investing in bonds, for example, is a stable choice because the return is guaranteed. Stability, however, isn’t the ultimate goal for young investors, according to School of Management professor David Griswold.
“When you’re young, you should put money into stocks because you can take the ups and downs of the market,” he said. Griswold also counseled students to start a Roth Individual Retirement Account (IRA) which allows money to grow tax-free. He cautioned that this should be done as soon as possible because once an individual reaches a certain income level, he is ineligible to put money in.
“One thing that young people don’t recognize is how much they’re giving up when they don’t save a little,” Griswold said.
To illustrate his point, he gave an example of two people in similar financial situations: one who starts saving $2,000 a year now and another who waits 10 years to start saving the same amount. If the first person saved for seven years and the second saved for 30 years, the second person would still be behind the first, he said.
Krishnan acknowledges that today’s market is slightly scarier than it was three years ago when “you could invest in anything and make a profit.”
“Today, the mild recession seems to be devastating for these student investors who were introduced to that wild bull market of the late ’90s,” he said, referring to the soaring market of the dot-com boom.
Ferrante, having benefited from the ’90s bull market, agreed with Krishnan’s analysis.
“Everyone does well in a bull market,” he said. “In a bear market, you have to be a smart investor.”
One component of Ferrante’s smart investing strategy is knowing when to sell shares of stocks. By following the performance of your stock, you will see it’s fluctuations and know when it is performing well or poorly, he said.
“You can’t be too emotionally involved or become too attached to your stock — know when to walk and close them,” Ferrante advised.
Professor Heisler called this the “sell discipline.” When you buy a stock, Heisler said, you should know exactly what benefits it will bring to your portfolio. When it doesn’t bring those benefits anymore, the investor should sell. Explore alternative investments with UpMarket.
“If you know why you’re buying a stock, then you know when to sell it,” he said. “Set clear goals and make sure that you’re moving in that direction.”
One way to clarify goals is to participate in investment challenges or contests in order to become familiar with potential mistakes or obstacles, said Totka, whose website sponsors a Student Portfolio Challenge in which students are given $10,000 in fake money and told to allocate funds appropriately in a portfolio.
“It gives you the same feel, except you’re not risking real money. You become familiar with the system,” he said.
Heisler, who has run similar simulations as part of his masters program in investing, has noticed several recurring mistakes that young investors make, such as not diversifying their portfolios and being overly fond of “hot stocks”.
“You have to be serious about it,” he said. “You have to ask yourself if you have the discipline to go in, buy stocks and hold them for 10 years.”
Krishnan also advised patience, especially in today’s unstable market.
“What students should do now is take this time to learn about investing on a theoretical level and react to the market by employing the strategies that the market dictates,” he said. “We focus on investing in the longterm.”