College Freshman Investing Advice

Prof Malloy asked several friends for any college freshman investing advice they would give to a college freshman who is interested in learning about the basics of investing. Here are several responses and book recommendations to help students learn about investing. Disclaimer: these are people’s personal opinions (anonymized) and none of this is certified financial planner advice.

 

Quick answer as I’m sitting with my coffee Is to tell them to go buy the book, The Richest Man in Babylon. That is the best summary of the fundamentals to saving and investing. With that foundation set they can get more sophisticated. 

https://www.malloyindustries.com/library/the-richest-man-in-babylon 

https://www.amazon.com/Richest-Man-Babylon-George-Clason-dp-1939438551/dp/1939438551/

https://en.wikipedia.org/wiki/The_Richest_Man_in_Babylon

https://jamesclear.com/book-summaries/the-richest-man-in-babylon

 

The best Investing resource I can recommend is I Will Teach You To Be Rich by Ramit Sethi.  I’m specifically referring to the newly revised book, but he runs a blog by the same name.  

Amazon link

This is a general personal finance book, which also covers just about everything someone needs to know about their own personal investments in all stages of life.  It’s also extremely readable for all experience levels.  Ramit is genuine, writes everything in plain English, gives practical guidance (to the point of phone scripts for calling your bank or credit card company), and is also really funny.  As a CPA who works in finance, I loved it and learned a good deal, as did my girlfriend who has zero background in finance, personal or professional.  

The book covers literally everything you need to know about personal finance – credit cards, bank accounts, retirement, investing, etc.  It’s not a deep dive into professional finance or anything like that.

 

A few quick thoughts:

Motley Fool does an awesome job with the basics. It’s been a decade since I read them much, but they cover everything from personal finance to the value of saving, to how to invest responsibly. They may have an intro set of blogs/articles compiled that I’d recommend (and they have a solid, informal tone).

Dave Ramsey is awesome for most people, good for most of the rest, and just okay for a very small sliver. I think for college students, it’s a great foundation bc it teaches them how to be very responsible, and they can loosen from there as they build wealth. e.g., he’s anti using credit cards, even if you pay the bill monthly…his point is that even if we plan on paying monthly, most people get behind and start carrying a cc balance, and then they’re toast. True…but some people actually WILL pay it monthly, and then a credit card is convenient, lucrative with points, etc. So it’s good advice for 90% of people, and at the very least a good perspective for the rest (especially if they’re starting from scratch). His advice on insurance was AWESOME…probably bc I had never heard anyone break down how to think about insurance as a portfolio. Changed how my partner and I did insurance. Net:net, he offers a good foundation, so I’d recommend it.

https://www.daveramsey.com/dave-ramsey-7-baby-steps

https://www.daveramsey.com/blog/types-insurance-cant-go-without

https://www.daveramsey.com/blog/5-term-life-insurance-mistakes

https://www.zanderins.com/dave-ramsey-tips-on-insurance

https://www.daveramsey.com/coverage-checkup

 

  1. Never invest what you can’t afford to lose.
  2. Investing/saving is a habit, if you wait to you have a round number (i.e. $1K) available to invest you’ll live to your means (i.e. you have to have a plan to save), so even if you only invest/save $5 a month your lifestyle will adjust to buy one less drink/eat out one less time, and the same is true if you can afford $100 a month or more. Just keep an eye on fees if you’re investing small dollar values.

 

I hope this is echoing a lot of other advice but the most important things to remember when getting started investing are the following:

  1. Build a monthly budget– you can’t do anything with your money if you don’t know where all of it is.
  2. Pay yourself first– the first item you take out of your budget is whatever money you plan on saving/investing.
  3. Start small– it’s more important to build a habit of saving/investing than it is to have a large pool of money at age 22.
  4. Pay attention to percentages– whether we’re talking about interest rates on debt or mutual fund fees, these are the most important numbers to understand. A mutual fund that promises a 6% annual return but charges a 2% fee is really only giving you a 4% ROI. If you have a student loan interest rate of 4.5% and a 401k that is getting 7%, you should focus on adding to the 401k rather than just paying down your loans quickly.
  5. Risk tolerance– a person in their 20’s should be looking at their investments in the long term. COVID-19 destroyed the stock market but I’m still in my 30’s. I know that I’m not planning on touching my investments for another 25-30 years. The worst thing you can do is react to the daily swings of the S&P.

I seriously hope that everything I’ve laid out is repetitive.

 

This is a really fun topic. I would say from a high level there are two major philosophies to follow: it’s never too early to start (sooner is so much better than later) and choose things you believe in (or more specifically people you believe in).

In terms of more details, I tried to address each of your topic areas:

Resources – so in order to get serious about investing, the resource is researching and reading information on items or industries you’re interested in. There are a ton of resources that devote time to tracking and commenting on the market. I would suggest the free options. There are plenty of paywall-activated information sites: The Motley Fool is one example. This site can be a resource, if you are willing to spend the time to research, all of the information is available without having to spend resources that could be invested.

Strategies – Diversify. What does that mean? It means managing investments across the market, across multiple forms of liquidity, and across multiple forms of tax exposure. Investments across a market balance risk such that peaks and valleys are removed, i.e. some things go up and some things go down, but in the long run, everything generally goes up. Liquidity is just how fast you can turn an investment into cash, cash is the quickest, investments get trickier, you always want to have some cash available since life or COVID happens. This is really important starting out because savings can be minimal, it’s also extremely important when you are relying on market securities as an income source- i.e. if COVID happens you don’t want to have to sell stock at the bottom just to make income. Finally, tax exposure, whether tax is deferred to a later date (401k) or tax is paid upfront (Roth IRA).

In terms of strategy, you need to be a little bit of your own accountant and know what income you have versus what expenses you have. You can google different allocations of income, to savings, the main point here is that you have some. First, find out if an employer matches a retirement – if at all possible set your minimum amount to get the full match. If a company matches 3% – you should set your contribution to at least 3% – so you get 6%! There are some caveats here, like if 3% towards retirement doesn’t allow you to make rent, but otherwise get the match. Other necessary accounts are a rainy day account – put some multiple of months income in this account (3, 6, 9, or your choice). A normal expense/checking account. This should be able to cover all monthly expenses: rent, food, date night, hobbies, drinks, etc – the idea that investing or saving means don’t have a life is false. Just set it up so that you save/invest first and have fun with the rest. That’s it! Everything else is just extra, if you want, it makes you happy – then by all means let it spark joy.

Options – You have them. There are all kinds of ways to invest – through banks, through employers, apps, etc. Everyone has a unique number that not only balances income and expenses but also one’s own level of risk tolerance. So if you have 0 Fs given, an income that meets expenses is your comfort number. If you are looking for canned goods for your storm shelter, an income that greatly exceeds expenses and leaves plenty of disposable to buy said canned goods is your comfort number. The comfort number is different for everyone, and unique to a certain geographic location, i.e. rent/home prices vary. Once you get to a comfort number or better yet align your expenses to achieve a comfort number – you should be saving some in a rainy day, getting at least the match from retirement accounts, investing some in something you believe in, and having enough left over to buy a round of drinks, go ax throwing, or whatever thing that pops into your mind.

Now there are some items that can help with those extras, namely points programs, loyalty programs, and credit cards. I hesitate to talk about credit cards because they can be such a pitfall. There are plenty however that provide benefits in terms of travel programs or cashback – just follow the rule of never carrying a balance over and they work beautifully.

Templates – Google sheets, while not as powerful as Excel, do have built-in functions (=googlefinance()) provide all kinds of real-time or near real-time information based on the inputs.

Advice – So in summary, do the math to find your comfort number, start as early as you possibly can, and research those you believe in. I certainly know that I found someone to believe in with Prof Malloy. I was and am proud to be an investor in Waveborn :).

 

I’m in a reasonably privileged position, and I can tell you what I’ve done:

  1. If your employer offers you a match on your 401k, take it, all of it, every time
  2. I’m mostly in index funds, and really entirely in stocks. I’m not looking to spend too much money in the short term, so I’m really not concerned with things moving up and down day by day, even with this recent crash. A Random Walk Down Wall Street is the bible here. I think it’s probable that as indexes become a large percent of the total money invested, they’ll show their fragility and we may have a financial crisis related to that, but I don’t think we’re there yet.
  3. To that extent, I’m thinking a lot about Nassim Taleb recently and my views may evolve here, he’s all about creating positive options while eliminating downside risk. I loved Antifragile and also read Skin in the Game. I’ll get to his other works down the line. He would recommend keeping mostly cash (~80%) and using the rest to take wild bets that could 10x or more. The closest thing like that I have in personal experience is my Bitcoin experience. It’s a lottery ticket I happened to get in on at a good time and it could have an outsized impact on my life. Ideally, I’m looking to diversify those bets a little to other companies/opportunities

A Random Walk Down Wall Street

https://www.goodreads.com/book/show/40242274-a-random-walk-down-wall-street

https://www.amazon.com/gp/product/0393358380/

https://thepowermoves.com/a-random-walk-down-wall-street-summary/

https://smartasset.com/financial-advisor/a-random-walk-down-wall-street

Antifragile

https://www.goodreads.com/book/show/13530973-antifragile

https://www.amazon.com/Antifragile-Things-That-Disorder-Incerto/dp/1400067820/

https://sivers.org/book/Antifragile

Bonus Book Summary

https://sivers.org/book/FourPillarsOfInvesting

 

I don’t have a lot of unique investing wisdom to drop on your students, but I thought I would put together a list of personal finance items that I wish I knew five years ago as an undergrad at Georgetown. 

Investing

  • It’s easy to start investing even with small amounts of money. I’d recommend opening an account with a major brokerage firm (Charles Schwab, TD Ameritrade, Fidelity, etc.) and starting with a small deposit.
  • All of these brokerages have pretty straightforward layouts and explanations of the financial terms that are helpful to understand (mutual fund, ETF, index, limit order, market order, etc.)
  • Unless you’re a big risk taker, I would avoid buying individual stocks and instead start with no-fee mutual funds or ETF that track major market indexes like the S&P 500 or the DJIA. You don’t need to have any unique ideas or do a lot of research to feel comfortable investing here; you’re basically making a bet that the stock market as a whole will go up (which it has historically tended to do over the long run). This seems like a good place to put the disclaimer that *this is not certified financial advice and the stock market may also go down*
  • I’m a big believer in the merits of dollar cost averaging. The idea here is to buy a fixed dollar amount of a stock (or an ETF / mutual fund) on a recurring basis. If you buy $100 of stock on the first of every month, you’ll buy more shares when the stock price is low, and fewer shares when the stock price is high. This leaves you with more shares over the long run, and mitigates the risk of buying a lot of stock when the price is high.

Savings Accounts

  • If you have extra money left over at the end of the month, but you don’t want the risk / hassle of opening an investment account, my next recommendation would be to open a high-yield savings account
  • High-yield savings accounts are as safe as ordinary checking accounts, but offer APRs around 1.50% – 2.50%. Savings rates are very low at the moment (thanks Coronavirus), but still much higher than ordinary checking accounts, which can be as low as 0.01% if they pay interest at all
  • The trade-off here is that you can only access these accounts a limited number of times each month (I think 6 per month is standard), so this should not be money you plan on using for daily purchases
  • There are plenty of banks offering online savings accounts (Discover, Capital One, Ally, Marcus). Depending on the amount of money you have to deposit, you can shop around and look for sign-up bonuses

Credit Cards

  • It makes a lot of sense to apply for a credit card and begin building your credit score, even if you’re only 19 and even if you don’t plan on using it frequently. Having a good credit score will eventually mean cheaper loans, lower security deposits, and better credit cards, but it takes time to develop a strong credit history
  • Be realistic about the type of credit card you’ll be approved for if it’s your first one. You probably won’t be approved for credit cards that offer great travel rewards, cash back perks, etc. American Express isn’t going to take the risk on someone with limited credit history. Applying for credit cards that you aren’t qualified for (and being denied) is bad for your credit score
  • You may need to get a ‘secured’ credit card; these require you to deposit a certain amount of money ($200-$500) and you receive a credit line secured by the money you’ve put down. If you consistently make your monthly payments, you get your initial deposit back and you get access to an unsecured credit line
  • It’s worth searching ‘credit cards for students’ and doing a bit of research. Both Capital One and Discover have good options for borrowers with limited credit history
  • This goes without saying, but never never never make a credit card purchase that you won’t be able to pay off at the end of the month. Interest rates on credit cards are extremely high (21-36% APR)

Miscellaneous

  • Investopedia has a free ‘term of the day’ newsletter that can be good for building financial knowledge. I was subscribed for this for a significant portion of my time at Georgetown. Someday an interviewer will use one of these words, and you’ll be glad you knew what it meant
  • Sidenote here, but investopedia is a great resource generally. I see people with 10+ years experience in finance searching things on Investopedia to learn something new or confirm their understanding of a topic
  • There are several courses that finance majors take as Sophomores / Juniors that mention several of these finance topics, so your students will be exposed to these topics in a lot more depth before graduation
  • For students that want to dive a lot deeper into investing, there are several good finance clubs on campus. GUSIF, GCI, and FMA were popular when I was in school; I think several more clubs have emerged since then.

 

It’s important to pay down debt (prefer to pay down higher-interest debt first, and take advantage of balance transfer opportunities as they exist across your credit card portfolio (yes I use that phrasing purposefully; it too should be actively managed).  I’d also use a fund complex where trading is free (highly recommend Schwab or Fidelity, especially since Schwab has an attached checking account with free atm withdrawals around the world) and for someone starting out, stick to low cost (expense ratios) ETFs (again why I’d prefer Schwab/Fidelity).  Importantly, though, be truthful to yourself and know what your goals are. i.e. if you can only afford to part with $20 a month, that’s perfectly ok, but don’t go buy Apple stock.

 

For long term investing read anything about Warren Buffett, the king of value investing in solid companies:

https://www.cbinsights.com/research/buffett-berkshire-hathaway-shareholder-letters/

 

This is a great topic to explore. Given that you could easily teach an entire semester-long course of this sort of stuff, I’ll try to hit on the key points and keep it digestible. 

-Compounding/Time Value of Money. While not the exact same, there is a lot of overlap here. Essentially, the longer you can allow your money to grow, it turns over on itself and will grow in a way that speeds up. A good analogy for this is that as you go out and work hard for your money, you want to send your money out there (in full work attire-helps with the imagery) to work hard for you too. The best part about this is that the longer you give it, this money will work harder and harder for you, which means that eventually, you can ease off working so hard.

-The Rule of 72. While this is definitely a sub-point under compounding, it is a good heuristic. Take your rate of return, and divide it into 72, that’s how many years it will take your money to double. I’d take your students through an example. Also worth noting is that when it comes to compounding and the time value of money, it’s not your first “doubling” that matters, but your last one. The last one a doubling could mean millions of dollars, that’s why it’s so important to start early.

https://www.investopedia.com/ask/answers/what-is-the-rule-72/

-Know your numbers/budgeting. Nobody should expect to be entirely on top of finances during college, but getting in the habit of knowing where your money goes is critical. So many folks I work with earn hundreds of thousands or millions of dollars per year and don’t know how much money they spend per month. Track where you spend your money, literally every dollar, for a couple of months (this could be good homework), just to increase awareness of where your money goes, what you spend it on, and then you can make judgments over what is good spending vs not good spending.

-Live within your means/under your means. Everyone has heard of keeping up with the Joneses, but it’s critical. Don’t be cheap but be frugal, get your money’s worth. Making sure however much money you’re earning, you’re saving some money every month (even only a bit) is a good habit to get in. Then as you get raises, bonuses, try to not increase your standard of living, or definitely not as much as your raise. Watch that gap of income and expenses grow.

-Emergency Fund. keep enough money in cash to cover 3-6 months’ expenses, in case you get laid off, have a hospital expense, etc. Don’t dip into this unless it is an emergency, not for an investment, a vacation, anything. This is safety.

-401K. This is the standard workplace retirement account. Contribute to it, even if only a bit, start contributing, let it grow. Often there is a matching component where the firm will match a certain percentage. Up to that percentage, any money contributed is 100% return (due to match).

-Time Horizon. this is WHEN in all your planning. If you want to buy a house in 3 years, your time horizon is 3 years. Make your plans for funding this purchase, saving for it, investing that money (or not) based on your time horizon, how rigid it is, etc.

-Market Timing/Dollar Cost Averaging. Market timing is when you want to try to pick the best time to make an investment. The difficulty comes in that you have to not only choose the best time to buy but also the best time to sell. Good luck, it almost never works out for anyone. Instead, consider dollar-cost averaging, where you put the same amount of money into the same investment at regular intervals over time. Doing so means that you naturally buy more shares when prices are lower and fewer shares when they’re higher. It’s super cool.

-Asset Allocation. how much of your money is in what asset class (stocks vs bonds vs cash vs alternatives vs commodities etc). Each one has a different return and risk characteristic and behaves differently together in different combinations. Basically, match this to your goals and time horizon.

-Tax brackets. get an understanding of how incremental taxes work. How at greater incomes, you pay greater taxes, but in a progressive manner, not for all your money, only your incremental money.

-Index Funds. when in doubt, Warren Buffet told his own family to do this. Basically, if you can’t predict which companies are going to do particularly well over a given period of time, index. This is buying an entire class of shares, like the S&P 500. It tends to be pretty cheap, takes a lot of risk off the table because it diversifies, and will go up and down with the markets.

-Diversification. this is basically instead of putting all your eggs in one basket, invest in various things which help you spread out your risk. That way if something does poorly, you’re not impacted as much.

 

 

There are so many topics that I’m leaving out, so basically, TL;DR

1) Understand what you spend money on/save money monthly/budget/live within your means

2) Create an emergency fund

3) Invest in 401K- 100% returns up to company match before any investing happens

4) Know your goals/time horizon, so you know what you’re going after

5) Set your asset allocation/investments to match goals/time horizon

6) Diversify, probably index, dollar cost average

7) Be patient, this stuff takes time. Doubling $100 is nothing, doubling $1mm is something.

Also, always keep learning. I read at least a book a month, often closer to 2-3, many about finance, investing, etc, but also personal growth, biographies, etc. There are some good podcasts out there, take a listen and see what messages resonate with you. The “For Dummies” series has some pretty good stuff on personal finance, take a look.

 

 

The most useful book I have read on investing was Common Sense on Mutual Funds by John Bogle. Dense and long book but, if one can get through it, you will have all you need to know about investing. I also found the book When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein to be quite illuminating, and counter to its title, quite short. A lot of the investing and the investment noise is tuning out the cacophony of so-called experts. This book was illuminating in showing me that those who think they know it all, inevitably and invariably, make basic mistakes. Don’t fall for the folks trumpeting their expertise 🙂

 

Overall, just invest for the long term and don’t try to beat the market. This means young investors should: 

  1. Put aside as much of their paycheck as they can into savings 
  2. Put as much of that savings as possible into tax-deferred accounts (IRA and 401k)
  3. Put most of what they save into low fee index funds (Vanguard or Schwab funds)
  4. Pay off high-interest debt (like credit card debt) as fast as possible

I think this is like 90% of it. The rest is the details. 

Simply put, 1) Don’t try to get too cute with investments and beat the market. Thousands of fund managers and traders get paid lots of money to work 80 hours a week to try and beat the market and most of them don’t do it. So how will you do it? 2) Appreciate the value of compounding interest, which means starting to save and invest early in life. 3) High-interest debt will crush you so avoid it as much as possible. 4) Don’t forget to enjoy life. 

Money doesn’t buy happiness on its own. Lots of rich people are miserable. That said, being financially secure opens up doors and alleviates stress, so be smart about your money. As much as possible, set it and forget it. If you need to scratch the itch to be an active investor, carve out 10% of your net worth and play around with it, but make sure the vast majority of your money is in boring long-term stuff. Services like Wealthfront make this easy. 

A good book for college students thinking about their lives ahead is The Defining Decade: Why Your Twenties Matter–And How to Make the Most of Them Now. I read it at 24 and am glad I did. 

 

 

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