[MUSIC PLAYING]
Hello, everyone, and welcome back to what
may be the most scary, intimidating,
"I want to avoid it but know that I shouldn't" episode
of our "Guide to Getting Good With Money
for College Students," and that is the episode all
about investing.
And I promise, although this topic
may feel very intimidating, that once you learn a few basics,
it's actually quite easy to understand.
And understanding investing and how to use it to your advantage
is one of the most powerful things
that you can do to transform your own financial future.
So many people stay out of the game
simply because they don't understand it and leave it
to a few rich folks to get all the spoils.
Time for us to get in the investing game.
But first, we have to understand what investing actually is
and what is the difference between savings and investing.
Well, the difference is pretty simple.
According to Wells Fargo, the difference
is in how you plan to grow the amount.
Saving is something you do yourself.
You add money to an account over time
or purchase a certificate of deposit.
You may try for a high-interest savings account,
but generally, there's no risk or volatility
when you're saving.
What you put into it is about what you get out
of it, with maybe a small percentage increase if you're
really savvy.
Investing, on the other hand, introduces risk.
It's possible that the amount of money you put in can decrease,
but it's also possible that a small investment
can grow into a huge one with patience and a bit of luck.
So we understand that investing is different from savings
in the sense that it represents a greater level of risk,
but a greater level of potential reward with your money.
But why is it important for a college student
to know about investing, or more importantly, to start
investing?
Well, provided you have a solid emergency fund,
which you can learn more about in our episode on savings,
which should always be the first place
that you're directing your savings,
experts are a broken record about the fact
that the sooner you start investing, the better.
In investing, there is a concept called the investment horizon,
which is basically the length of time
that you give an investment to mature.
And since most investments deal in compounding interest,
the longer time your investment has to grow,
the more work it will do for you and the more interest
it will yield.
Longer periods of time also allow you to ride out
eventual dips in the market.
We all essentially know that the longer time
you give yourself to invest, the better it will be for you.
But this often isn't played out in practice.
Only 39% of adults started investing in their 20s,
according to a report from Morning Consult,
although 50% of respondents said they should
have started in their 20s.
In other words, by starting as early as possible,
you're maximizing your ability to save and grow
your investments.
Before we get into all of the different types of investments
that you should be taking advantage
of through your financial life, though, it's
important to understand what we're
talking about when we talk about the concept of investing.
Now, obviously, there are a lot of ways to think
about investing in your life.
If you're in college right now, you're
making an investment in yourself.
And hopefully, depending on what you're studying
and how you're studying it, it's a good investment.
But when we talk about investing in financial markets,
that's a very specific concept.
And it's important to understand,
when people talk about those mystical stocks and bonds, what
that actually means.
Generally speaking, stocks can be
thought of as a tiny piece of ownership--
and I mean infinitesimally tiny, in most cases,
piece of ownership-- of a given company.
Bonds you can think of like a loan,
often held by a company or a government
or another entity, for which you become
a tiny, tiny piece of the creditor or the debt holder.
Generally, stocks are more volatile, bonds less so.
But what's important to remember is
that when it comes to investing, a healthy investing
strategy is not based on individual stock picking--
i.e.
When people talk about, like, well, I'm
going to buy X amount of Nike or Apple.
Not only is that one of the most risky ways to invest,
because your investing is not very diversified--
i.e. containing lots of different investments to offset
overall risk--
it also depends on you being able to accurately predict
the market, which is very, very unlikely.
In fact, even professional brokers and traders
are often not very good at predicting the market.
One of my favorite studies on the matter
tested the ability of brokers to predict
the market versus a litter of kittens,
where they had a bunch of different stocks laid out
on the floor on pieces of paper, the names written on them.
And they had kittens choose the stocks
by walking on the pieces of paper they wanted to pick.
The kittens outperformed the brokers.
So the more you can start to think
about investing as a much more generalized participation
in the market, where the accounts that you're using
are just like big, big baskets of stocks and bonds,
all different types from all over the market,
and not so much focusing in on one specific stock,
the more you can start to understand the overall concept.
One of the most common types of investments that most of us
are likely to encounter in our lives are retirement accounts.
I mentioned earlier in our video about savings that retirement
is one of the most important savings goals
that you should be working toward,
including in your early 20s, or even in college.
But what are the specific account types
that these retirement accounts actually entail?
For most of us, most of the retirement
accounts that we're going to be utilizing are
types of investments.
They're just special types of investments
that are meant to be tapped into at retirement,
which for most of us tends to be around the age 65.
You may try to save more aggressively to retire earlier,
but for many of us, 65 is a good benchmark
and gives us about 40 years for our investments
to grow if we started investing in our mid-20s,
which is a great investment horizon.
But let's talk about some of those specific retirement
accounts that you're likely to come across in your lifetime.
The first type of account is called
a 401(k), which many of us will often be
offered through our employer.
When you invest in a 401(k), you're
investing in a pre-set portfolio.
You're diverting part of your income
into investments, like stocks and bonds.
Many 401(k)'s put money into targeted funds that
are expected to grow and peak at the year you plan to retire,
such as a Vanguard Target Retirement Fund.
They utilize index funds, which is a collection or portfolio
of stocks and bonds carefully selected by financial experts.
These retirement accounts are essentially hands-off investing
that you contribute to monthly.
Most 401(k)'s are tied to stocks and bonds,
so they typically grow in value beyond the raw money
you put in.
That's why starting early gets you the best results.
Another common type of retirement account is an IRA.
IRA stands for Individual Retirement Account,
because it isn't tied to your job,
and you make direct contributions to it.
There are multiple types of IRA, too.
One popular one is a Roth IRA, which
is a portfolio similar to a 401(k).
It could be preset, but you could also
build the portfolio yourself via stocks, bonds, ETFs,
and mutual funds.
And do remember, as I mentioned in our savings video,
that what makes retirement accounts so unique
is that they tend to be tax advantaged.
And you can learn more about how they
can have those tax benefits for you
and save you money by checking out our video on savings.
So beyond retirement, which is how many of us
will most aggressively utilize investing,
there are tons of really good ways
to make your money work harder for you
by utilizing investment for longer term savings.
As we talked about in the savings video,
once your goals get beyond the 5 to 10 year mark,
investing in the market can be a great way
to have higher returns if you're able to ride out that timing
risk.
Because imagine you have to pull that money out at a time
when the market is really taking a dip.
That could be a bad situation.
But if you have some flexibility on the timing
and the savings goal is longer term,
investment can be awesome.
And many people use it to their advantage outside
of just retirement.
And when it comes to investing, you'll
often hear people talk about something called
a portfolio, which is, basically put,
just a collection of your different investments.
That can include things like your 401(k) or an IRA,
but it can also include other non-retirement investment
funds.
Your portfolio is going to include a mix of stocks, bonds,
and cash.
And the degree to which those things
are mixed and the proportion you have in a given portfolio
is going to be reflective of how risky a portfolio is.
As I mentioned earlier, stocks tend to be the most risky,
the most volatile, but can potentially
offer the highest reward.
Another reason why starting to invest younger
can be advantageous, as I mentioned,
is that with a longer time horizon to allow
your investment to mature, you don't just give time
for interest to accrue.
You also allow yourself to ride out big potential market
downturns.
When it comes to building your portfolio,
there are a few ways to go about it, from relying on an expert
to assemble one for you to buying into something called
an index fund, which is a type of mutual fund with a portfolio
constructed to match or track the components
of a financial market index, such as the Standard & Poor's
500 Index, or S&P 500, which you've probably heard of.
Index funds track the general movement
of the market, while assembled portfolios actively
select stocks that they hope will beat the general market.
An active fund portfolio manager will track the stock market
and advise on when to buy shares in specific stocks
based on trends.
It can be a much faster growth in your money
when the trends are accurately predicted.
But as I mentioned earlier, there's
no guarantee that the predictions
are going to be accurate.
And it can mean a lot more cost to you,
because you are having to pay that financial advisor.
But there's also been a development in between,
something you may have heard of called robo-advising, which
is a relatively recent development in investment,
and it's targeted primarily at new investors.
Robo-advisors are a low-cost alternative to a broker.
And a broker is a person who will buy your assets--
in this case, stocks-- for someone else.
They'll usually charge a fee per trade,
and robo-advising charges only a flat monthly fee
or a small percentage.
You get less customized insight and attention,
but it's also much less hands-on and expensive than most
traditional brokerages.
Robo-advisors include apps like acorns, Betterment,
Wealthsimple, robinhood, et cetera.
And they can be a good way to get into the investment mindset
without investing too much time or money.
But the most important thing to keep in mind
with all of your investments is to keep at it
and to not allow small market downturns to discourage you.
One of the biggest problems that inexperienced investors face
is getting freaked out the first time they log on
to check their portfolio and see that it's
taken a huge dip because the market's having
a really rough time.
It is almost inevitable that this will happen many times
over the course of your investment horizon.
And if you take out your money at a time when the market has
taken a huge downturn, you're doing the worst possible thing
you can do with your money, which is referred to as locking
in your losses.
Until you actually take your money out of the market,
those losses, that downturn in the value of your portfolio,
is only really theoretical.
But once you take that money out, you make it real,
and you ensure that you are getting
all of the hit of that money's loss.
You have to learn to be patient.
Many of us, myself included, don't look at our portfolios
when we know it's going to be really ugly, because it's just
going to give us unnecessary anxiety.
You have to be consistent.
Keep on a strategy based on what you can afford
and what your goals are, and don't really
allow yourself to be too influenced
by the noise of what's happening in the market today.
This is obviously just a very basic overview
of the concept of investing and how
you can start getting involved in it yourself.
But I do encourage you to learn more about investing.
Our friend Erin Lowry at Broke Millennial
has a fantastic book, her guide to investing,
that will explain everything you need to know.
But first, informing yourself on how it works and, second,
getting a patient and long-term strategy in place
that you can stick to are the two keys
to taking advantage of everything
the market has to offer.
Investing is not just for old, rich people,
unless you leave it to them to take all of the spoils.
Don't forget to check out the next episode
in our "Guide to Getting Good With Money
for College Students."
And for all things talking about money,
don't forget to check out The Financial Diet here
on YouTube or all around the internet.