If there's one thing Motley Fool Answers hosts Alison Southwick and Robert Brokamp enjoy, it's hearing from their listeners, so they particularly relish the monthly mailbag episode. But even they can be overwhelmed by the quantity and breadth of those queries, so this time around, they've invited a couple of friends to help out: serial podcast guest Jason Moser and Answers newbie Abi Malin.
In this segment, Malin fields a personal finance question from a young adult with a bit of case, a long time horizon, and a need for some direction about how to begin investing.
A full transcript follows the video.
This video was recorded on July 31, 2018.
Alison Southwick: The next question is for Abi and it comes from Clay. "What is the best money investment advice you can give to a college student? I have some money that I would like to invest, but I don't know how, where, when, or if I should?"
Abi Malin: This is a really good question that I think a lot of people face. Just taking it step by step there, should you? Yes, you should. When? I would say sooner rather than later. Now, if you're thinking about it, data shows that because of compounding returns you'll actually set yourself in a stronger financial position by starting sooner. Clay is obviously on top of it. He's still in college and already thinking about it, so I commend him for that.
And then for an answer as to how, I would recommend the first place you start is by comparing brokerage account options and opening one. I personally use TD Ameritrade. I think they have a lot of flexibility. They have options trades and plenty of research which I use. But for young adults I recommend at least looking at Robinhood. They were previously a mobile-based app but now they do have a website.
They offer commission-free trades and they recently launched commission-free options trading, as well. I think it's pretty interesting and I think it's a low cost. When you think about opening accounts a little bit smaller, keeping those commission costs in check or zero is ideal. Again, there's a lot of options so I think just starting to research and pick one.
And then after you've opened your brokerage account where to put your money is obviously the million-dollar question. If I had a succinct answer to that I would be running this company.
I think there's a couple of different strategies to start. You could start by buying ETFs or just index funds for an instantly diversified portfolio. Another effective strategy is to buy high-quality companies that you're interested in holding for the long term and just build out your portfolio, so starting with one or two and then maybe adding over time. Again, keep your commission costs at a minimum, so making sure that you don't wipe out any returns before you even get in your position is really important. And then maybe taking some sort of combination of the two ETF and maybe some concentrated positions and particular equities that you like.
One strategy that I used and I felt really helped me was to make a list of companies that you want to buy and then add money and invest on a schedule rather than being so price conscious at the beginning, because over the long term it's not really going to matter that much as long as it's within a reasonable range. This can help you build good habits as you become an adult investor with a larger portfolio.
Southwick: Probably as a college student Clay is going to have some debt hanging over his head at some point. Do you feel it's OK to have that student debt and start dipping your toes in investing or do you want to pay that off before you start investing?
Malin: I was helping my sister with this because she went to PA school and she is sort of in the same situation and was asking me. I think that there's obviously reasonable limits on both of those, but if you can manage that investing, now will really help you down the long term. With interest rates where they are and as low as they are, it's probably in your best interest to invest as well as pay down debts.
Robert Brokamp: I'd agree with that. Most student loans are in the mid-single digits. Ideally your investments would earn more than that. But if you're talking about credit card debt, where the average rate is 17%, in that situation I think I'd be more inclined to pay that off first than start investing.