From, tulip bulbs in 17th century Holland to tech stocks in the 90s the temptation of investors to chase short term gains has led to innumerable financially ruinous moments in the course of human history. 2020’s combination of quarantine induced boredom, easy access to financial markets, and a renewed interest in day trading is no different. Though day trading (short term buying and selling of financial products) can be a profitable endeavor it is more often not and in some occasions can be devastating financially. One study of day trading activity found that a mere 13% of traders break even annually. Luckily, young investors are better positioned than any other group to build a successful investment portfolio. Before getting started investing it is important to consider a few thing:
- What are you goals and timeframe? The magic of compound interest, interest in earned in one year put to work in the second year and so on, allows investors to turn even a small amount of cash into a nice chunk of change given enough time. If a 20-year-old student invested $1,000 in a retirement account and earned 7% annually, they would have $21,000 by the time they retired at age 65. Compound interest is an incredible tool for building wealth over your lifetime. Investing may not even be appropriate for short-term goals. Investing some money for your fall tuition, for instance, could have resulted in a 30% loss alone in the month of March.
- What is your strategy? Buying individual stocks can be lucrative but presents a great deal of risk. Are you buying this stock because of familiarity with its brands or because you understand and like the financial performance of the company? Can you read a 10-k and balance sheet? If not, there are financial products available that allow investors to easily and cheaply invest in many stocks simultaneously. Though these might not perform as well as some individual stocks, historically few investors out perform the S&P 500 index in the long run.
- Are your finances in a place that investing makes sense? The average person can build wealth through a lifetime of financial discipline and most critically a budget that will allow them to find the cash to consistently invest. Consider establishing emergency savings before investing. What good is putting money in an investment account if you have to take money out to pay for new set of tires? Have high interest debt? No investment account is likely to outperform the return on investment of paying off the 20% interest on credit card debt. Learn more about personal finance in this video series:
Resources:
iGrad course on investing : https://www.igrad.com/courses/investing-to-build-wealth
iGrad course on retirement planning: https://www.igrad.com/courses/planning-for-retirement
Scarlet and Gray Financial Coaching: go.osu.edu/yourfinances
-Ben Raines, Wellness Coordinator | Financial Wellness