Opinion: How to actually invest as a college student

Keegan McLaughlin

Peyton Willams wants to demystify investing for students.

Investing as a college student can seem overwhelming, like trying to put together a puzzle with missing pieces. The majority of individuals think they need a big fat check, inside knowledge or a never-ending number of hours spent reading before even getting started. Others simply have no idea where to begin. The reality is that investing is simpler to accomplish than it might seem. It’s a question of finding out the basics, making some intentional moves and figuring out things that fit your student life. College is an ideal place to start setting habits around money since you have fewer long-term commitments and more ability to learn from small mistakes.

The first decision you’ll face is what kind of investor you want to be. Do you want to be an active investor, digging into individual stocks and companies? Or would you rather have a “set it and forget it” strategy with funds that track the overall market? There’s no one correct answer — it depends on your risk tolerance and how much time you have to devote to managing your portfolio.

For most students, simplicity is key. Broad-market index funds or exchange-traded funds (ETFs) that track benchmarks like the S&P 500 offer exposure to hundreds of companies at once, helping reduce the risk that one poor-performing stock will derail your returns. An ETF is simply a basket of investments like stocks or bonds that trades like a single stock, making it easy to buy, sell and diversify.

For more secure investments, start with bond ETFs. Bonds, actually loans you lend to governments or corporations, are less risky than stocks and return a predictable income in interest payments. As an example, the Fidelity Total Bond ETF (FBND) only dropped about 2.7 percent during a recent 12 percent market dip, sheltering investors from volatility while still yielding dividends. Bonds like these can add stability to your investment portfolio, especially if you are in the market for consistent income. If you are a risk-taker and want more potential for returns, then stock ETFs are where you need to go. The S&P 500, also referred to as “the market,” swings wildly in the short term but in the long term has given solid returns. Large-cap, also known as “blue chip” stocks like Coca-Cola or Johnson & Johnson offer steady dividends and stability, while small caps are newer, faster-growing firms that are riskier but can be outperformed over the long haul. Large-cap stocks are simply stocks with lots of market capitalization, so the biggest companies while small-cap stocks have less market capitalization, so smaller companies. You also might invest in both large-cap and small-cap funds. The large-cap stocks will give you some dividend income and generally not be as volatile with price changes while small-cap stocks will give you opportunities for high growth potential. Mixing a portfolio of the two will give you a bit less correlation and volatility in your portfolio than a portfolio of just small-cap stocks while giving you more growth potential than a portfolio of just large-cap stocks. You can find ETFs on whatever investing site you use that only hold large-cap or only hold small-cap stocks.

Risk tolerance declines with age. The idea of being 80 and having $1 million invested in stocks alone is daunting — a 12 percent drop would have you $120,000 poorer in a week. For this reason, financial planners typically recommend shifting toward safer investments like bonds as one gets older. As young investors, though, we can tolerate the volatility because we have working years to come and plenty of time for markets to recover.

Diversification is also important. In addition to stocks and bonds, other investments such as gold, silver and real estate can be used as hedges against inflation. It sounds crazy, but you can go on your investing site and just search up “real estate” or “gold” and invest directly into it, as easy as that. When prices are increasing, these industries tend to do well. They also don’t follow the stock market in a perfect correlate, so they can balance your portfolio when stocks are doing poorly. Real estate investment trusts, gold and other precious metal ETFs, or foreign equity funds are easy ways of gaining such exposure. Because foreign markets generally move in a different manner than American markets, holding overseas stocks will diversify your portfolio more. You can even learn about “holding cash” within an investment plan. That doesn’t mean stuffing dollar bills under your mattress. It means putting idle money into a money market fund. It puts your unused cash into short-term corporate or government bonds and gets a modest but steady return. For instance, the Government Money Market Fund (SPAXX) just made around two percent, allowing your unused cash to at least partially keep up with inflation.

To show how it all fits together, below is an example of a simple diversified portfolio for an example young investor (for educational purposes only and not investment advice):

20 percent in the S&P 500 (e.g., Fidelity 500), 10 percent in a bond ETF (e.g., FBND), 15 percent in international stocks (FSPSX), 10 percent in gold or real estate ETFs (e.g., FSAGX or FSRNX), 5 percent in a money market fund (e.g., SPAXX), 20 percent in blue-chip stocks (FBGRX), and 20 percent in small-cap stocks (FSSNX).

Before you begin buying anything, make sure you have a simple way to contribute money to your investments. Most students, including me, will spend more than they know on little regular purchases such as Global Cafe coffee, takeout or subscriptions we forget about. Saving even $5 a week in your portfolio can create strong habits without affecting your daily routine. Brokerages such as Fidelity, Vanguard, and Schwab allow you to automate regular contributions using a strategy called dollar-cost averaging that allows you to invest regularly without regards to timing the market.

If you earned income from an internship or a part-time job during the year, you can also open a Roth IRA. Contributions are made with after-tax dollars, and withdrawals at retirement are completely tax-free. It might seem unnatural to be thinking about retirement while in college, but a Roth IRA is one of the best ways to build wealth in the long term and learn how to invest responsibly. If curious about Roth IRAs, check out my previous article entitled “Roth IRAs and the race against future taxes.” Most importantly, investing is not where you put your money — it’s how you think. This is a skill that comes from years of practice, not something learned in one course. Read books, websites, or listen to podcasts on how markets work and why markets act a certain way. Understanding concepts like market cycles, valuation and investor psychology enables you to make informed decisions rather than chase trends. Linking investing to the rest of your financial life, such as budgeting or student loans, will prevent you from making common mistakes.

College students get one special benefit: time. You can experiment a little of this, a little of that, and learn without having to show immediate results. Maybe you mess around with socially responsible investing, experiment with an international market ETF, or combine stocks and bonds and watch them go live. The goal isn’t to get rich overnight. It’s to learn and become more self-assured so you can be a smart investor for the next few decades. Investing as a student doesn’t have to be difficult or confusing. If you are mindful of your options, diversify sensibly, and are patient, you can make great progress toward living financially independent far beyond graduation. The earlier you start, the stronger your financial foundation will be for the rest of your life. Invest in yourself today and you’ll thank yourself later.