Stonks. We all love the dynamic meme with the Jess Bezos-looking cartoon. Even more, we love the gains. And we love the green. If you know what’s up already, you probably already dabbled in the market a bit. But if you thought of a grocery store when I uttered the word “market”, perhaps you haven’t invested in the stock market yet. Either way, for current investors and potential ones, you came to the right place. Before we really get going, the following text identifies as an opinion article on the importance of investing in stocks, and I am not a financial advisor of any sort. This article intends to be merely informational and introductory. If you do find yourself interested, consider consulting a professional!
Let’s get into why investing in stocks proves better than saving, the difference between stocks and ETF’s and a relatively simple strategy for the college investor.
Now that my legal bases are covered, some stock market basics await at your leisure. The stock market consists of public traded companies. That basically means these companies create shares of ownership that can be individually bought on the market. As the “value” of the company increases, the individual shares increase, thus, returning the initial investment with additional monetary benefit.
I say “value” because the actual value of a company can be misleading. A stock’s price can mostly be attributed to the amount someone will pay for it, not necessarily the true worth of the company. In short, the more someone will pay for a share, the more the share price will go up. Now that you’ve read through and understood the basics, let’s go over why investing will give you a bang for your buck in the long run.
Why You Should Invest Instead of Save
Honestly speaking, the idea of investing gets me excited. As a college student, I believe that saving your money ends up as relatively wasteful. Even though your parents and grandparents have always taught you to “save, save, save,” and that “stock market is gambling,” I still strongly believe the interest return from a savings account proves as a relative rip-off.
“Even the best savings account return interest rates usually never come close to the stock market returns,” UC Berkeley Senior Jordan Kang said.
The average annual return on a student’s savings account is (according to the FDIC) “0.0.5%.” This means your money should grow at a safe and steady rate, right? No. Inflation fluctuates between 1-3% annually which means, even if the best possible thing happened for the inflation rate, you actually lose money when it stays in the savings account. Inflation leads to why a savings account, in my opinion, is merely something for a rainy day. In other words, something you keep in case you need to access some emergency cash.
Enter: my overarching argument. You should invest instead of save because of this simple fact: the average annual return of the S&P 500 over the last 90 years is 9.8% a year. Subtracting the inflation from this puts it at about 7% actual percent. I am no mathematician… but 7% compounded annually will get you much better returns than a savings account averaging even or negative returns after inflation. Besides, if you invest, you’ll have something to impress your dad and uncle with at Christmas dinner. Win-win.
Stocks vs ETFs
Before we get into a great beginner college student strategy, we must first understand the differences between stocks and ETFs (or exchange-traded funds). An ETF contains a collection, or portfolio, of stocks that you would buy into as opposed to buying solely into an individual stock. Why wouldn’t you just buy individual stocks that are all a part of that ETF, you may ask? The price of individual stocks vary immensely from pennies to tens-of-thousands of dollars for a single share. While most stocks won’t be priced at more than the thousand-dollar mark, purchasing an ETF makes for a fantastic way to cheaply gain exposure to multiple stocks for a fraction of the price.
For a beginner just getting into the market, ETFs will more than likely be your best friend. They expose you to substantially less risk and do most of the work for you.
“ETFs are pretty beginner-friendly but, are sort of boring compared to picking individual stocks. But ETFs are definitely safer,” USC Senior Lucas Schwartz said.
Of course, picking individual stocks can be much more fun (and risky). If you really must pick some individual stocks, I’d recommend a 20/80% split. Therefore, 20% of your portfolio can be your money to pick individual stocks with, and the other 80% goes into ETFs. Doing this for a year or two will protect you while you familiarize yourself with the market. If individual stock picking doesn’t sound like your thing, the following strategy might be for you. This all goes to say, know the difference between these two kinds of stocks and which ones to invest in.
Dollar-Cost Averaging Technique
If you feel skeptical of what I’m telling you, good. You should be skeptical because the stock market will chew you up if you don’t stick to a plan. The stock market can and will go down. Chances are, there will be a time in which you buy some stocks and it immediately goes down, resulting in some lost money. As an investor, you should be ready to experience losing money. If you stick to a plan and don’t allow a big, red “-whatever %” to make you panic and sell everything, you’ll be fine over the long run.
“Dollar-cost averaging is probably the simplest strategy for a beginner or student who is too busy with other things to manage their money. And it’s really easy if you stick to it,” Northwestern Junior Charles Cho said.
With this in mind, the strategy below can be a fantastic way for a college student to get started in the stock market. Dollar-Cost averaging involves picking a certain time during each month and setting an amount of money. Say perhaps, every time you get paid you devote 10% of your paycheck by distributing it evenly into your portfolio. For example, you could pick three ETFs—$SPY(S&P 500 Index), $QQQ (a NASDAQ index) and $IWM (Russell 2000 ETF)—and every two weeks when you get paid, you put 3.3% of your paycheck into each ETF, no matter the price of the ETF. You can also buy a share of each on the first Monday of every month. Adhering very strictly to this strategy takes a lot of the thinking out the money management, and will inevitably “average” your cost average as the stock goes up or down over time.
How to Succeed in Investing in Stocks
Conviction and self-control make this strategy work. It will not work if, when the stock goes red and you seem to be losing money, you sell. My advice: just don’t watch it if it bothers you, check in on your scheduled time to buy your set amount and leave it alone until next time. Over the course of several years, these indices will nearly certainly go up. And if you have stuck to the plan, your money will have been right there along for the ride.
If this strategy appealed to you, the next step would be to pick a brokerage and get started. Following this strategy really gives you the option of using any brokerage, it won’t make that big of a difference. Best of luck, and remember to stick to your stock plan so that one day you can finally say “stonks” proudly… with your loads of cash to prove for it.