Investing as a Graduate Student
Investing as a graduate student may seem like an oxymoron. Even today, the word “investing” is still something many people think only the wealthy can do. If we’re talking about investing hundreds of thousands or millions of dollars into startup companies, then yes, only the wealthy can do that. Investing is a percentage game. The more you invest, the more you can profit. 10% of $1 million is $100k. 10% of $1,000 is $100. Simple as that.
Today, there are several beginner FinTech platforms out there so anyone, including graduate students, has no excuse to not invest. It is quite concerning how little graduate students know or care about investing. Maybe it’s because they think they don’t make enough money. Believe it or not, they do! Investing just has to become a priority expenditure by cutting costs elsewhere. In this article, we’ll talk about some of the ways you can go about investing as a graduate student.
Note: This is not an article on how to pick individual investments. Nor is it a review of the platforms I am going to describe. There are thousands of books, articles, and YouTube videos that you can study on this subject. Perhaps I’ll write an article on my strategies and opinions sometime in the near future. Instead, I’m just going to introduce you to some ways to start investing. Also, by investing, I mean buying and holding your positions for years at a time before selling them at a profit. Trading — the buying and selling of positions on a frequent basis — has tighter regulations and is not the focus of this article.
Types of Investments
There are many types of investments out there. The most popular are probably stocks (AKA equities), bonds, real estate, precious metals, and cryptocurrencies. This article will focus primarily on stocks since they’re the easiest to start with and most practical for investing as a graduate student. The same is true for cryptocurrencies, but they should not be your primary investment. First, a note on risk and debt.
Your tolerance for risk typically shifts as you get older and retirement gets closer. If you’re a graduate student, chances are you’re in your mid-20s. Since retirement is 4–5 decades away, you can afford to have a riskier portfolio right now. Riskier investments often translate to higher returns if they work out but have the potential for larger crashes — generally earlier-stage companies and innovators. I don’t mean unreasonably risky like penny stocks.
As you progress toward retirement, it makes sense to contribute more and more to stable investments in the form of certain exchange-traded funds (ETFs) and bonds, of which there are many types. Many retirement accounts will take care of asset redistribution for you. While the stock market as a whole will never go to zero unless there’s a nuclear war or decimating disease outbreak that wipes out 75% of the population (buy precious metals as a hedge), you should never invest more at a time than you’re prepared to lose.
Many students have both credit card debt and student loan debt. Credit cards are charging you between 18 and 25% interest on your balance each month. Before you begin thinking about investing in other areas to achieve a 10% annual return, pay off your credit card debt. The extra money you’re paying in interest is far greater than the profits earned from investments. You’ll see your credit score increase significantly, and that extra money you spent on interest payments can go towards your investments. Student debt is, of course, important to pay off in a timely manner as well, but the interest rates are much lower. You should spend more paying off your debt than you do on investments.
Pretty much everyone, regardless of education level, is at least familiar with the stock market. The value of public companies is divided into shares and traded on various exchanges. Each share is a portion of ownership in a company, hence the term “equity”. Two of the most popular exchanges are the New York Stock Exchange and NASDAQ. The price of a stock fluctuates with the perceived value of a company — directly influenced by the actions the company takes. In addition to stocks of individual companies, there are also thousands of ETFs among other fancier products.
Exchange-Traded Funds (ETFs)
ETFs are arguably the safest form of equity investment since they spread the risk out among several companies in an industry with a common focus. When you buy shares of an ETF, you are taking a position in all of the companies in that ETF. Historically, the average annual growth of all stocks is somewhere around 8% per year. In my opinion, this is a conservative growth rate for young investors considering some stocks and ETFs can exceed a 15% return on investment (ROI) per year over a 15+ year period. Additionally, 2–3% inflation each year really means that your net return is more like 5% per year on these more conservative investments. If you’re a really low-risk person, 5% may be fine for you. This is an unnecessarily low risk and return for a young person investing small amounts of money. Most well-known companies younger people would invest in return much more than this on an annual basis.
There was a time just a few years ago when you needed about $1,000 to get started investing in the stock market. Big institutions often have minimum investment requirements of >$1,000. Even if you can circumvent this (you can), buy/sell commissions of about $7 really eat away at your purchasing power when you’re buying one share of a company for $20. Additionally, most investment institutions do not allow you to buy fractional shares of a company. This makes it rather difficult for amateur investors to buy shares of large, powerful, high-growth companies like Amazon whose shares are nearly $1,900 each. However, innovations in financial technology have yielded several new investment apps that make it stupidly easy to get started investing in the stock market for as little as $5.
There are several well-known investing apps out there with professional and celebrity endorsements. The most popular ones are Acorns, Robinhood, and Stash. These apps are either free or very low fee subscription-based services. We’re talking a dollar a month. There is also no buy/sell commission. Additionally, these apps allow you to purchase fractional shares of a company or ETF for as little as $5. So anyone with $5 to spare can download these apps and invest in mammoth companies like Apple or Amazon. I highly encourage you to do your own research on each of these. They are extremely simple to use, and they provide tons of free in-app educational articles to get you familiar with investing.
I personally use Stash, so I’d like to mention some features of Stash that make it and other investment apps extremely convenient to use. First is that you can invest $5 at a time. As I noted in the introduction, investing is a percentage game. $5 is nothing. However, investing just $5 a week in an ETF that suits your fancy is better than nothing! It also allows you to dip your toes into other companies or ETFs that you wouldn’t put $100 or $1000 into. These apps allow you to set up automatic purchases for as much of whatever you like as often as you like. It’s very intuitive.
Consistency and Opportunity Cost
The key to investing is consistency. When you just have to push a button and not remember to log in and manually execute orders each week, consistency becomes mindless and works in your favor. While these apps do not have every single company in the world on their platforms, they have a strong selection. Good enough for our purposes. Stash’s primary focus is ETFs. They have many grouped by “Beliefs”, “Balance”, and “Life” to suit a wide range of investor interest. I recommend you start investing with one of these apps. They are extremely cheap, convenient, user-friendly, and an excellent way to become familiar with the world of equity investing.
It’s wise to save at least 20% of your after-tax income. Fund your tax-advantaged retirement account(s) first, then your stock accounts, then an emergency fund. Think about how much you spend a month going out to a restaurant or bar. If you spend $300 a month and decided to invest half of that per month at a 10% annual ROI for 30 years, you’d have $312,000 before taxes and inflation. At 15% ROI: $844,000. 20%: $2.35 million. That’s opportunity cost — just be aware that it’s incredibly unlikely to achieve a 20% annual ROI for 30 years. I’m certainly not saying don’t have fun with your friends or take vacations. Everyone should do those things because some experiences are truly priceless. It’s just important to understand how much your spending could actually make for you if it was invested properly.
401(k) and Individual Retirement Accounts (IRAs)
401(k)s are those things your parents probably told you to enroll in when you got your first real job. In short, a 401(k) is a retirement program where employees of a company can contribute money from their salary on a tax-deferred basis. Many companies will even match your contribution up to a certain percentage of your salary. Unfortunately, full-time graduate students are not eligible for these, so there’s no need to discuss them further here.
Individual retirement accounts come in two flavors: traditional and Roth. They’re tax-advantaged investment accounts. Graduate students are eligible for these, and they’re very important. The main difference between the two is when you get the tax break. If you expect your tax bracket to increase throughout your life, i.e., make more money, then a Roth IRA is the better choice since you contribute your after-tax income. Also, your capital gains are not taxed when you withdraw your money after age 59.5. You do not have to withdraw your money after that age so it can continue to grow into your 90s if you like.
Setting up a Roth IRA isn’t very difficult. There are several financial institutions that manage many billions of dollars in assets that are good choices for your retirement account. Two very well known ones are Charles Schwab and Vanguard. Both are good, but since we’re graduate students and don’t have a lot of money, the best option is the one that requires the lowest startup capital. At this point, we don’t need anything super fancy. Vanguard has a minimum requirement of $3,000 to open a Roth IRA, whereas Schwab’s minimum is $1,000. However, they will waive this minimum if you enroll in an automatic contribution program where you contribute at least $100 a month to your IRA. The maximum contribution for 2020 is $6,000 for people under 59.5 years old.
Shop around and decide which suits your preferences best. There are many firms that will manage your IRA. The earlier you start, the better, since compound interest is more effective at higher portfolio values, which takes more time to reach. Each year you wait could potentially be costing you hundreds of thousands or even millions of dollars later in life. NerdWallet has a great article on IRAs. I encourage you to read more here. Believe it or not, you can actually set up IRAs through the mobile investing apps mentioned previously. However, I recommend setting yours up through a larger financial institution for the sense of security.
Crowd-based Startup Investing
In the introduction, I said that investing hundreds of thousands or millions of dollars in startups was for the rich. At that level, it’s obviously still true, but in 2016, the SEC enacted Title III of the JOBS act. In the simplest terms, it allows startup companies to raise capital from non-accredited investors, i.e., the general public. Several platforms now exist to allow ordinary people to invest in startup companies. Republic is one and Wefunder is another. At least for Republic, they screen startups using their own due diligence process. They only approve 3% of the companies that apply. It’s your job to find the companies that you believe will be successful in the future. Note that this is extremely risky. It’s essentially educated gambling. Most startups fail. Be prepared to lose your money, so don’t invest more than you can lose. Invest in the founders and the idea because you believe in it. Also, only invest in fields that you actually understand. Don’t invest thinking you’ve found the next Facebook and that in a few years you’re going to be worth millions. It could happen. It’s just extremely unlikely.
You should be aware that this option requires an up-front time investment to identify the startup companies you personally support the most. It is mostly passive after an initial investment is made (unless you’re investing tens to hundreds of thousands of dollars). In most cases, you cannot sell your position and get your money back. However, it is wise to monitor the progress of your chosen company as an exercise to understand how its actions influence the outcome as a company and the valuation of your investment.
Truthfully, I don’t know a lot about bonds except that there are different qualities (like stocks), and that high-quality bonds are stable investments. However, they are slow-growing and thus are more suited to older investors with lower risk tolerance. Benjamin Graham, a mammoth in the 20th century investing community, wrote a book called The Intelligent Investor in 1946 that has been revised several times. It is highly recommended by many notable investors including Warren Buffet. In this book, Graham states that an individual’s portfolio should never exceed 75% in stocks and it should contain 25% bonds at a minimum. As I alluded to previously, he states that this proportion should shift progressively to favor bonds as one ages. In my opinion, very young people can afford the risk of having nearly 100% of their investments in high-quality stocks and ETFs, but should abide by Graham’s rule as they get older. If you would like to read more about bonds, Investopedia has a great article on them.
Real estate can be an excellent investment, but the barrier to entry in this space is typically far too high for students. This is reserved for people who typically have a much higher net worth than a 20 something-year-old student and much more time to make it work. Make no mistake though, you don’t need to be a millionaire to invest in real estate, although it helps. There are ways around this. If you are very interested in this area, I encourage you to watch some YouTube videos on it. Kris Krohn has some excellent material on this subject. I don’t know a whole lot about this area, but I intend to learn it and make these kinds of investments later in life.
Precious metals include gold, silver, platinum, rhodium, and others. They are also very expensive (with the exception of silver). At the time of writing, gold costs $1,548 per ounce. Rhodium, the most expensive metal in the world, is $6,250 per ounce. These prices may seem prohibitively high, but you can buy them on a gram scale rather than by the ounce. Accumulating some over time is a good idea. However, when you buy precious metals in small amounts, you pay a higher premium than you do when buying larger amounts. This just means that you pay a higher percentage more than that mass of metal is worth when you buy smaller amounts.
Like stocks, precious metals tend to increase in value over time. Also, in the event of a worldwide stock market crash or another catastrophe, precious metals may be one of the few investments that retain at least some of their value. Precious metals are solid investments for this reason. Once you start to accumulate significant wealth throughout your life, it’s probably wise to pull some money out of riskier stocks and put it into precious metals for stable long-term growth.
Remember cryptomania in the summer of 2017? There was practically a new cryptocurrency coming online every day. Most of them were total scams and went bankrupt. However, the big boys have stuck around: Bitcoin, Litecoin, Ethereum, and a few others. Most people who invest in cryptocurrencies don’t fully understand how they work. This includes me, admittedly. However, it doesn’t take a genius to look at the historical price changes of bitcoin to realize that it probably isn’t going anywhere. Bitcoin was worth about $900 at the very beginning of January 2017. It rose to almost $20,000 at its peak in mid-December of the same year before plummeting to $3,500 over the next year. Then, it ran up to almost $12,000 by June 2019. It is currently trading at about $7,000 per coin which is still seven times higher than it was trading just two years ago. Is it going to continue to rise? I can’t say for sure, but many people are comparing Bitcoin to digital gold: not as an everyday currency, but as a hedge against the U.S. dollar.
If you’re hungry for a little extra risk with the potential for a big payoff, investing in the big three cryptocurrencies may not be a bad idea. It is definitely not wise to invest more than 10% of your portfolio into crypto, though. The valuations are still largely speculative, i.e. volatile, and regulations are still in the process of being fabricated. Coinbase is arguably the most well-known crypto trading platform, but its fees are high in my opinion. There are plenty of other options you can read about here.
You’ve probably heard that having lots of cash in a savings account is a terrible investment since the rate of inflation typically exceeds by far the interest rate granted by banks. Inflation is about 2.5% a year. Many banks have interest rates of around 0.1%. Therefore, your money actually decreases in value over time in a savings account. This is even true in your checking account where it accumulates no interest at all! Money likes to work. If it isn’t put to work, someone who puts it to work will take it from you.
That said, you should have some cash available at all times. Not just for your basic expenses, etc. That’s a given. You want to have cash for those sudden investment opportunities. The market has been in bull-mode for over 10 years now. Sometime in the future, there will be a hefty downturn. Those who understand how investing works and believe in their investments will not freak out and sell for a loss. They will have cash at the ready so that they can buy more of their favorite investment when it goes on sale during those times. Save some cash for a rainy day when you need it, and save some cash for those sudden investment opportunities. Don’t panic. If you’ve made solid decisions, double down, buy more on sale, and things will eventually return to normal.
Some Book Recommendations
The Intelligent Investor by Benjamin Graham
This is the mac daddy of investment books. It’s dense and definitely not a page-turner, but the information provided is priceless. This is especially true for those who are serious about entering the world of value investing in individual stocks and startup companies. It provides a thorough history of the stock market. It gives you the tools for investing wisely, not necessarily to get filthy rich like Warren Buffet, but to avoid losing tons of money. However, if applied correctly, the knowledge to get filthy rich investing is definitely in here.
I Will Teach You to be Rich by Ramit Sethi
This a phenomenal book that very clearly walks the novice through credit card debt, student loan debt, bank loans, and retirement saving/investing. It breaks down these concepts for the complete novice. It also discusses preparing for large purchases like a car, wedding, home, and saving for your child’s college tuition. It’s a must-read in my opinion for anyone looking to get their financial life on track and should be referenced often. Note that this book is targeted to the average person who wants to have a stable financial life and comfortable retirement, not the aspiring CEO. Regardless, the information is applicable to anyone wanting financial security.
Thinking, Fast and Slow by Daniel Kahneman
This masterpiece is the career’s work of Nobel prize-winning economist Daniel Kahneman. He delves into his psychological research on human decision-making. Throughout the book, he maintains how cognitive bias influences choice at every level of activity up to the highest levels of investment and corporate decision making. For a deeper dive, read the review of Thinking, Fast and Slow here.
Everyone is familiar with investing, but not nearly as many people do it as they should. This includes graduate students. Investing may seem very complicated at first, and that’s true with certain investments like real estate. It requires too much effort for graduate students. We need something more passive. Investing in stocks, precious metals, and cryptocurrencies is easier and cheaper than ever before. Extremely low cost and easily automated investment plans enable graduate students to begin investing for both retirement and personal profit. Investing becomes more interesting when you start seeing those positive returns roll in. By working together, we can increase the proportion of graduate students who invest their money intelligently.
Originally published at https://doctorately.com on January 7, 2020.