- Investing early is one of the best ways to build long-term wealth, which makes your college years an ideal time to start
- Before trading stocks in college, you’ll want to set your goals, adopt a realistic strategy and determine what you can afford
A combination of savings, retirement and taxable brokerage accounts means you can secure your future and dabble in the stock market simultaneously
Most people don’t remember their college years as a time they were flush with cash. But, thanks to technology, investing is easier and cheaper than ever.
So why not get started in college? After all, you’ll never have a longer time horizon until retirement than when you’re fresh out of high school. Investing early means that your money has more time to earn compounded interest.
Not only that, but your college years are a formative time for building healthy habits. By laying the initial groundwork and starting your portfolio, you’ll get the hard part out of the way before you even graduate.
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Investing early is one of the best ways to secure your future – as long as you build good habits, that is. Here’s what to know about investing while trading stocks in college.
Know your why
Before you dive in, consider why you want to invest. Having a reason to underpin your efforts makes it easier to stick with your plan long-term, especially during economic or personal financial instability. This “why” can be anything from retiring early to building long-term wealth to meeting life’s milestones.
Set your goals
Once you’ve determined your why, it’s time to set some long-term goals. Think about where you hope to be in a few decades – and then make decisions to get you there.
For instance, if you want to buy a house in 10 years, you’ll probably want to balance growing your wealth and hedging against a market downturn. But if you want to retire in 40 years, you may be able to afford more risk now.
Decide how much you can afford
Generally, you should stock up your emergency fund with at least three to six months’ worth of expenses before you start investing. You’ll also have to consider how your portfolio contributions fit in alongside expenses like rent, groceries and debt payments.
At the end of the day, you shouldn’t invest what you don’t have. But don’t despair if your budget isn’t bursting with extra cash. All you need to get started is a few bucks a month.
Adopt a realistic strategy
In college, a realistic investment strategy is one you can implement in your free time, between classes and studying. It also shouldn’t involve more risk or capital than you can afford.
Generally, this involves investing in low-cost, well-diversified index funds and exchange-traded funds (ETFs). These passive investments expose you to a wide variety of investments with just a little bit of capital.
If you prefer an active strategy, you can also look into actively managed funds or start trading stocks yourself. However, we generally caution against active trading approaches, as they often eat more time and capital than they’re worth.
Build your knowledge
One of the best presents you can give yourself is the gift of knowledge. Spend some time browsing reputable resources to familiarize yourself with investment lingo, market trends and strategies. (Personally, we think Q.ai is a great place to start.)
Commit to investing regularly
One of the best ways to build wealth is to invest regularly instead of trying to time the market. By investing a portion of your income each month—even just $5 a week—you’ll get to take advantage of strategies like dollar-cost averaging. Plus, you’ll start building healthy financial habits that will last well beyond your college years.
Sign up for a robo-advisor
Before you start investing, you’ll need to open a brokerage account. There are several options on the market today, including:
- Traditional brokers: Often offer a combination of online and in-person services and personalized investment advice. But they may cost more than the alternatives.
- Investment apps: Let you trade stocks, bonds and other securities on your own. However, their investment education and advisory tools may be limited.
- Robo-advisors: Use a short survey to assess your risk tolerance, time horizon and goals. Then, they build a personalized portfolio, generally consisting of investment funds.
Many college investors find that a free or low-cost robo-advisor, such as Q.ai, meets their needs just fine. (Did we mention that we also use AI to build our one-of-a-kind Investment Kits?) However, you’ll want to avoid brokers that charge fees out the nose, as they’ll eat into your investment gains.
How college students can put their money to work
You’ve done some research and found your “why.” Here are a few ways to get started.
Start with a high-yield savings account or CD
Investing isn’t just about trading stocks and bonds—you’ll also need a hefty cash reserve to see you through tight situations. You should stash cash you need in the short-term (under five years) in a safe environment, such as a high-yield savings account, a certificate of deposit (CD) or Q.ai’s Cash Reserve.
Unlike investment accounts, Q.ai’s Cash Reserve is backed by FDIC insurance. And while your money won’t grow as quickly as it would in an investment Kit, it has the potential to grow with reduced risk over time and will be there when you need it. (Learn more about the Cash Reserve here.)
Dabble in your taxable brokerage account
Regular brokerage accounts don’t provide the same tax benefits as retirement accounts. But they may offer more flexibility, as you can invest in more types of securities without contribution limits.
Plus, if you’re still interested in trading stocks as a college student (as opposed to just investing for your future), putting a few bucks into a regular account lets you do just that. Just don’t trade away money you can’t afford to lose.
Start investing for retirement
When you’re in college, retirement seems like a long way away. But retiring requires a lot of savings. (Experts generally say you’ll need at least one to two million socked away for a comfortable retirement.) The earlier you start investing, the more you’ll contribute over the years—and the longer your money can grow.
Open an IRA
An IRA, or individual retirement account, offers special tax advantages over regular brokerage accounts. These can be a great opportunity to build your savings and curate good habits. You can pick between two options:
- With a traditional IRA, you don’t pay taxes on your contributions or gains. But in retirement, you pay taxes on all qualified withdrawals.
- With a Roth IRA, you pay taxes before you contribute. Come retirement, you can make qualified withdrawals completely tax-free.
However, IRAs have downsides—namely, lower income phase-outs and contribution limits than 401(k)s.
Consider fund investing
Putting your money into low-cost index funds and ETFs is one of the easiest ways to start investing and diversify in a hurry. Passively traded funds may also come with lower trading costs and less volatility than trading individual stocks.
But index funds aren’t designed to grow your wealth fast. For that, you’ll have to look for actively traded funds or dive into growth-based investing. Just be prepared to accept higher levels of risk (and often bigger fees) as a trade-off.
No investment strategy is truly set-it-and-forget-it. Plan to check in on your portfolio on a schedule that makes sense to you, be that weekly, monthly, or quarterly. This will help you keep an eye on your performance and reinforce your long-term commitment to investing. You can also use these check-ins as an opportunity to reassess your holdings if needed.
And, when it comes to investing, consistency is key. Making regular contributions ensures a fresh supply of capital to grow your holdings. And the longer and more you invest, the bigger your portfolio can grow. While this method of trading stocks in college isn’t as exciting as day trading, it will make a massive difference in your future financial health.
Download Q.ai for iOS today for more great Q.ai content and access to over a dozen AI-powered investment strategies. Start with just $100. No fees or commissions.
Will There Be War Over Taiwan – The Next Spy Thriller
I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.
The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.
Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.
It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).
These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.
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One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.
I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).
In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.
Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).
In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).
On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.
Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).
So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.
Crypto Minsky Moment Now Happening
During the second half of the twentieth century, economist Hyman Minsky provided a set of guidelines to identify what makes financial markets fragile and economies unstable. It is the midpoint of 2022, and a crypto Minsky moment is underway.
Investment professional Paul McCulley coined the term “Minsky moment.” He did so when describing the dynamics of an earlier financial crisis, the Asian Debt Crisis of 1997.
Minsky actually died in 1995, and so was not alive either to witness for the 1997 Asian currency crisis, or to see his name used in a catchphrase for economic instability. Nevertheless, the term “Minsky moment” has stuck.
Here are three facets of the crypto Minsky moment that is ongoing.
1. At the beginning of 2022, Bitcoin BTC was trading at $47,743, and closed on June 30 at $19,986, down 58%. The market value of Bitcoin comprises the lion’s share of the entire crypto-market; therefore, as the value of Bitcoin goes, so goes the value of the entire crypto asset class.
2. Hedge funds are shorting shares of Tether USDT , a stablecoin that is not so stable and beginning to wobble. Notably, Tether is the major “coin of the realm” for the inter-crypto market, the exchange of one crypto-asset for another. Another stablecoin, TerraUSD, did worse than wobble: it collapsed in May.
3. The crypto-lender Celsius is now fighting for its life.
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In February 2022, Bitcoin was trading in the neighborhood of $44,000. At that time, I warned that crypto-investors needed to pay attention to how the issues Minsky studied applied to cryptocurrency markets. Now that these markets are experiencing a Minsky moment, let me just recapitulate in hindsight what I warned about in foresight.
Minsky’s framework features about a dozen major components. Below are six that just leap out.
1. Fringe finance: This was the term Minsky applied to what Paul McCulley — and now the rest of us — call “shadow banking.” Shadow banks are financial institutions that operate outside the central banking system, and do not have the central bank as their lender of last resort. Crypto-markets are a perfect example of fringe finance, as they operate at the fringe of the global financial system.
2. Speculative and Ponzi finance: Minsky warned about debt finance in which the source of the funds for making interest payments and repaying principal is price appreciation rather than cash. Prudent debt finance, Minsky was very clear to say, is based on hedge finance, where cash generation, not price appreciation, provides the funds for borrowers to fulfill their obligations to lenders.
Minksy warned, very loudly, that when market participants are gripped by euphoria, they shift from hedge finance to speculative and Ponzi finance. The stability issues associated with Tether and TerraUSD UST stem from the riskiness of the portfolios which back the stablecoins they offer, or in the case of TerraUSD offered. The concern is that these portfolios are weighted towards speculative and Ponzi finance. In 2021, a group of entities including Tether reached an $18.5 million settlement with the office of New York States attorney general. The office had accused these market entities of making several public misrepresentations regarding the dollar reserves which back them, especially the Tether stablecoin.
3. Asset pricing bubbles associated with financial innovation: Those wondering what an asset pricing bubble looks like need only look at Bitcoin’s history. Those wondering what financial innovation looks like, need only look at how DeFi has evolved to produce assets like Tether and lending institutions like Celsius.
4. Excessive leverage: Celsius has an assets-to-equity ratio of 19-to-1, much higher than 9-to-1 for the average North American bank in the S&P 1500 Composite index. Assets-to-equity is a standard ratio measuring leverage: the higher the ratio, the higher the leverage.
5. Bank runs, beginning with the commercial paper market: Tether is concerned about a run on its stablecoin, as investors rush to sell their Tether coins en masse. There are rumors that the assets backing Tether include highly risk commercial paper issued by Chinese entities. Tether denies the rumors, but that has not stopped hedge funds who are shorting the Tether to express their concerns that this is the case.
6. Too big to fail: Minsky asserted that during a financial crisis, governments would engage in what he called “contingency socialism” and rescue firms that are too big to fail. At this stage, there appear to be no firms large enough to qualify as too big to fail. TerraUSD certainly did not so qualify.
I am not saying that cryptocurrencies have no fundamental value, and in fact I believe that they do. Economists call the concept “value in use,” which they contrast with “value in exchange.” The problem is that there has been a large gap between crypto value in use and “crypto over-value in exchange.”
Crypto investors might believe that they are making bets on crypto-fundamentals; and indeed they might be doing so, to a small extent. The thing is to a large extent, most of what they are betting on is sentiment. Minksy warned that euphoria will surge during economic expansion, at least until the Fed raises interest rates to address inflation. Then investors’ sense of euphoria collapses, and with it asset prices.
As Yogi Berra once said, and might have said again in connection with Minsky’s perspective and crypto markets: It’s deja vu all over again.
Crypto euphoria is in a state of collapse, which is why crypto markets are experiencing a Minsky moment. Down the line, a crypto phoenix will rise out of the ashes, with less euphoria, similar to the way that the dot-com sector emerged from the dot-com bubble. Until then, investors of all stripes would do well to pay attention to what Minsky taught.
Stock Market Investors: Don’t Fear Inflation – Embrace It
The inflationary trend is now self-perpetuating, but that doesn’t mean investors cannot earn excellent returns.
Start with today’s inflation:
The three underlying causes are:
- Too much money
- Too low interest rates
- Inflationary actions/reactions being taken by businesses, other organizations, employees, consumers, investors and Wall Street
Number 3 is the reason an inflationary trend is so hard to stop. It’s a chain effect of “sellers” pushing prices up at least in line with cost increases and “buyers” attempting to hold back the inevitable.
Therefore, don’t expect this Fed to subdue inflation with a “soft” landing. Inflation well above the Fed’s 2% target likely is here to stay and even increase until the Federal Reserve and political leaders accept the need to take drastic, unsavory actions.
Okay, that sounds dire and distressing. So, where does the happy investor part come in?
How investors can win from the inflationary growth periods
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Remember, inflation is rising prices. On the surface, that means company revenues and earnings get an inflationary boost, producing stock price gains for investors.
However, industries and companies get affected differently. Therefore, succeeding in the coming inflationary bull market means adjusting strategies and expectations for the altered environment.
How to adjust strategies and expectations
The conditions to understand and accept are:
Inflation – Expect a rising cycle of higher highs and higher lows as organizations and consumers get into the swing of it
Interest rates – Realize they are still well below the level capital markets would set without Federal Reserve interference. So, consider this a bonus inflationary period where the Fed says it is tightening, but it actually is only reducing the loosening already in place. In other words, there is a long way to go before conditions truly get tight.
Economic growth – Until there is a recession, “real” (inflation-adjusted) GDP growth will remain positive. That means “nominal” (not inflation-adjusted) growth will be increasing at a higher clip as prices rise.
Company growth – Here is where things get interesting. An inflationary environment creates winners and laggards. Therefore, do not expect yesterday’s winners to be tomorrow’s in this new environment. Most likely, a significant shift will occur. And that brings us to…
Company stocks – As the financial, economy and business conditions transform, so, too, will Wall Street. Expect to see new strategies, selections and valuations based on inflation-based rationale. And that means the biggest change ahead is probably…
The shift to actively-managed funds from index funds
The inflationary growth period will push “outperformance” to the top of investors’ wish lists. No longer will matching the whole market’s middle-of-the-road results be satisfactory. As active managers charge ahead, investors will begin jumping aboard.
Skeptical? Don’t be. The combination of new, different and outperformance will be like meat to today’s malnourished investors. It’s a bull market cycle driven by extraordinary conditions that will replace the worry refrain of inflation-interest-and-recession (Oh, my!)
Note: Like many stock market periods, the reasons and results come from a combination of conditions and actions – not one simple explanation. Therefore, be sure to read my previous article, “Exceptionally Good Conditions For Stock Bull Market Launch In July.” In it I list four actively managed funds in which I have invested.
The bottom line: Multiple conditions build inflation trends, so ignore simplistic commentaries
Many (most?) media reports link simple explanations to results. Ignore them. They are written by reporters on a deadline with no time for analysis. Just think back to the gyrating explanations for each daily (or intraday) stock market move. The reason cited is normally a coincidental occurrence. For example, “8.6% inflation!” Or, “Consumer sentiment at a new low!” Or, when a simple reason is lacking, something like this from The Wall Street Journal (June 27) – (Underlining is mine)
“U.S. stocks slumped Tuesday, giving up early gains and falling for a second consecutive day as investors parsed fresh economic figures for clues about the pace of monetary-policy tightening.”
No, the market didn’t fall because investors were parsing for clues about anything. In fact, most short-term market moves are noise, often reversed a day or two later. A better short-term period to watch is a week, because the weekend market closure has day traders sitting on their cash.
Instead, follow economic, business and financial developments without trying to tie each to a stock market move. A beneficial approach for linking everything together is quarterly analysis. Why wait three months? Because each quarter contains all the earnings reports (and management outlooks), followed by the quarter-end reporting and analysis from active managers. Moreover, examining a trend quarter-by-quarter does away with all the in-between gyrations that can produce more uncertainty than understanding.
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