It no longer takes money to make money. Thanks to the rise of investing apps like Stash and Acorns and low-cost robo advisors like Betterment and Wealthsimple, you can start investing with pocket change.
Just $5 a day invested over 35 years at a 6 percent return could become more than $200,000. Invest it for 45 years and you’re looking at over $400,000. That’s a pretty good trade-off for skipping your daily Starbucks (ticker: SBUX).
It doesn’t take a Ph.D in investing to turn $5 into $400,000, either. It doesn’t require a degree at all. What it takes is the one thing college students have more than most: time. The earlier you start investing, the more time your investments have to grow. Notice the $100,000 difference between 35 years and 45 years above. So don’t let a lack of investing expertise keep you out of the market.
[See: 10 Long-Term Investing Strategies That Work.]
Watch the sidewalk for fallen coins, dig deep in those couch cushions and follow these steps to invest in college.
Step 1: Open an investment account. The traditional place for a new investor to begin is with a broker like Schwab or Fidelity. “Think of a broker like a bank, except it holds investments instead of just cash,” says Robert Farrington, millennial money expert and founder of TheCollegeInvestor.com. New investors can open an account online or in a local office and transfer savings from your bank account to fund it. Many brokers have minimum balances but you generally have a few months to meet those minimums.
Brokers offer the widest investment selection: Stocks, bonds, funds, just about anything your heart desires can be bought through a broker. But too much selection can be a bad thing.
A robo advisor or investing app with prebuilt portfolios may be a better choice if you can’t make a decision on your own. Another upside: Many robo advisors and apps have no minimums to get started. Some, like Stash, even let you buy fractional shares of actual stock. Think: Berkshire Hathaway ( BRK.A, BRK.B) for $5.
If you have earned income from a job, “consider an individual retirement account,” Farrington says. Contributions to a traditional IRA are tax-free, so you don’t pay taxes on it until you take the money out in retirement.
Roth IRAs work in reverse and can be an even better deal: You pay taxes on the money today, but then get to take it out tax-free later, which means if you sell something for a profit, you don’t have to share your earnings with Uncle Sam. And when you’re a new investor, sharing is not caring.
Step 2: Help your money stretch further. In the words of Tarzan: Watch out for those fees! Small investors can’t afford to have their hard-scrounged cash wasted on account or trading fees or high expense ratios. Even robo advisor fees, which seem minimal, can add up quickly. Before you open an account or buy anything, make sure you know what it’ll cost you.
For low-cost investments, look to exchange-traded funds or mutual funds. Think of funds as ways to buy hundreds or thousands of stocks for the price of one. For instance, one share of the the iShares Core S&P Total US Stock Market ETF ( ITOT), which holds more than 3,000 companies, costs just over $60. What’s more: the expense ratio on ITOT is only 0.03 percent, meaning only $3 of every $10,000 you invest goes toward paying fund expenses.
Investing in low-cost index funds will allow you to “capture market gains over [your] lifetime,” Farrington says. And since funds are inherently diversified, you only need one or two to get started.
An S&P 500 index “is probably a lifetime holding,” says Steve Ng, a professor at Clark University and independent registered advisor at Woodland Investment Consulting in Boston. As your wealth grows, you can “augment your market portfolio with individual stocks,” if you’d like.
Brokers like Schwab and Fidelity and most robo advisors have free-to-trade ETFs or mutual funds.
[See: 7 Investment Fees You Might Not Realize You’re Paying.]
Step 3: Add risk gradually. You’re young. You’re investing for the long term. You have time to ride out market dips and dives. All of this indicates you should invest aggressively in mostly stocks, and ultimately you should. But Toronto-based Dave Nugent, chief investment officer at Wealthsimple, counsels patience, young investor.
The biggest mistake new investors make is not sticking with investing. Far too often, “the market goes down in the first couple months of investing and [investors] swear off investing,” Nugent says.
To prevent this, he recommends starting with a more balanced portfolio “to train yourself to deal with [market] ups and downs.” A balanced portfolio is typically 60 percent stocks and 40 percent bonds. The more bonds you hold, the less your account balance will fluctuate.
Asset allocation mutual funds, which pick an asset allocation and hold it forever more, are an easy way to build and maintain a balanced portfolio. U.S. News & World Report ranks the best asset allocation mutual funds in by category.
Ng suggests his students begin with a fictitious portfolio to learn the ways of the market. “Do what institutional managers do,” he says. They “never launch an investment product unless it’s been proven, and the way you do that is using a theoretical portfolio without any real money.”
The key is to manage your Monopoly portfolio as if it were real money. Give yourself parameters. For example, don’t put more than 5 percent in any one stock, Ng says. And start with an amount that lets you invest broadly but which you can feasibly reach in the not-too-distant future, like $25,000.
Fictitious portfolios can be a great way to learn important investing tenets such as when active stock picking or passive ETFs do better, and how “to let go of the emotional side of decision making,” Ng says.
Step 4: Get back to real life. Once you’ve bought your investment(s), “take a holiday,” Nugent says. “Don’t look at your account” for at least few months.
Hyper vigilance can be an investor’s worst enemy. There’s no need to watch day-to-day market movements. Check-in once a quarter or so, but otherwise “focus on studying and leave your money to earn over time,” Nugent says.
“Investing takes time,” he says. Market downturns happen but over the long-term everything trends up. The trick is to let it ride.
[See: 8 Investing Do’s and Don’ts During Market Volatility.]
So “get started [early] and don’t be afraid of seeing your portfolio fluctuate,” Nugent says. You’ll be glad you did later on.
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How to Invest While in College: 4 Easy Steps originally appeared on usnews.com
