The college years are typically a time when students begin mulling future employment prospects and, in many cases, investing money for future savings. But in a year when the stock market has been altered by terrorist attacks and corporate corruption and investors have seen retirement funds and nest eggs crumble, experts advise students to use a great deal of caution in investing money, if they invest at all.
“These are scary times, and it also turns out, perhaps, good times for investing,” said Finance Professor Nejat Seyhun. “I would not recommend staying away from the market … everyone should be in the market to some extent, especially at this time.”
Business School Finance Chair Anjan Thakor stated that investing is a good idea for college students, given it is for the long run.
“The long run means you have no need to liquidate your portfolio for urgent and unavoidable expenses for at least 10 years and diversification is a necessary precaution.”
Seyhun shared the same sentiment. “College students can best afford to ride out ups and downs of the market over a long holding period,” he said.
He also noted that research shows one of the best times to put money in the stock market is after periods of large declines.
But as Jeff Carnevale, MBA student and vice president of research for the University Finance Club, pointed out, “We may be nowhere near any sort of bottom. Markets bottom in 10 to 15 years, not two or three. Valuations are also nowhere near the levels where previous market bottoms have occurred.”
He added, “You may find yourself waiting for years, if not decades, trying to gain ground or even recoup your initial investment. There have been times throughout history where the stock market has done absolutely nothing for decades.”
Carnevale said he felt the U.S. still has a bear market and “one of the absolute worst things you can do is to buy into a bear market too soon.”
On the other hand, Seyhun said he believed “corporate insiders are beginning to turn bullish.”
But regardless of how the market is shaking out, all three stated that if one does decide to invest, diversification is key.
“You should allocate for funds across all asset classes to achieve diversification and a comfortable level of risk,” Seyhun said.
“My philosophy is to hold a diversified portfolio of assets and not take large bets on any individual hot stocks, small companies or blue chips,” Thakor said.
Seyhun advised to “follow a strategy of balancing your portfolio periodically. Suppose you will keep 60 percent in stocks and 40 percent in bonds. If the stock market goes up a lot, sell some stocks to bring the fraction back to 60 percent. In the long run, you will find this to be a good rule to follow.”
While he said he was in favor of occasionally purchasing small stocks, he added it is necessary to think about the long term.
“It is not OK to jump in and out of small stocks based on rumors. It is also not OK to chase after winners. You would not buy and sell houses based on rumors. You should not do it for stocks either.”
Carnevale even advised holding cash for the time being.
“The winner in a bear market is the one who loses the least and has the most chips to play with come the next bull market,” he said.
Short-term government bonds are also a good bet, he added.
Seyhun reminded that it is important to compare stock price with the overall value of a company.
“Assets whose stock prices are high relative to fundamental value (say, book value) do not do well in the future. Other signals such as insider buying and selling also give us important fundamental signals about likely future performance,” he said.
For those just starting out, one option to consider is mutual funds, according to Thakor.
“Stock investing is typically best done through mutual funds for most investors who are not professionally skilled (or) trained,” he said.
It is important not to forget about investing in foreign firms, Carnevale added.
“There are some countries in the world that are selling at real bargains relative to the U.S. Just don’t try to pick these stocks on your own,” he said.
As for what to stay away from, Thakor warned against going for strategies an investor is not familiar with.
“The uninitiated investor should be very cautious about investing in derivatives like options,” he said.
Carnevale was wary of large-capital multinational firms.
“Most of these companies are going to suffer from slower economic growth because they are so large; they simply cannot escape it,” he said.
Day trading, while often glorified in the late 1990s, is a route also strongly advised against taking.
“It was a bad idea for most investors doing it and it still is not advisable for most investors who do not trade stocks for a living,” Thakor said.
And as Seyhun noted, “Who wants to sit in front of a computer screen day in and day out reading price quotes? I definitely hope college students have better ways of spending their time. Transactions costs alone will kill you.”
Carnevale said it will continue, but “very few will survive. Either (day traders will) run out of money or figure out that they weren’t really very good at anything, except maybe going long on a bunch of hot stocks.”
Real-estate investments have merited copious news coverage in recent months, but all three experts seemed mixed on the issue. While Thakor acknowledged that this type of investment may be good, investments in single pieces of real estate can be speculative and they “make sense only if you can spare the money and don’t need to liquidate in the near future. If you are buying raw land, remember there are no positive cash flows until you sell, but you do have to pay taxes.”
arnevale was more cautious about this type of investment.
“Don’t kid yourself. Prices can fall, and the market is not very liquid,” he said, adding that he did not think real-estate prices could continue the growth rates seen in past years. “There is no way that prices can sustain the rate of increase that they’ve seen. If wages don’t grow in sync with real estate prices, at some point there will be a problem.”
Education is essential if one wishes to enter the market.
“Read, read, read,” said Carnevale. “The best thing you can do is to educate yourself. Listen to everyone, but think for yourself. Be a student of history. And use your common sense to determine who is telling you the truth.”
Thakor was more specific, advising that “the best way is to look up the many funds offered by mutual fund houses like Vanguard and Fidelity. (The) best bet may be to pick a no-load, low fee, diversified bond fund or stock index fund. Performance information on these funds is easy to get by visiting the Websites of these funds, so you can make an informed decision.”
In the end, student investors should be prepared for the long haul. The large returns of the 1990s are over for the time being, the experts said.
“Clearly, the stock market (S&P 500 Index, Dow Jones Industrial Average) is down 20-30 percent from peak levels of 2000 while NASDAQ index is down 75 percent from its peak in 2000. The economy is sluggish at best,” Seyhun said.
Last but not least, do not attempt to compete with the professionals.
“Only the best, seasoned investors are adept enough at finding value in the rubble. There are always some bargains out there, but the average person will have a tough time with this game,” Carnevale said.