9 Investment Tips I Always Give My Students

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skynesher / Getty Images

While you can invest at any point in life, there’s no better time to get started than when you’re young. After all, you have time on your side. And if you also have the know-how and some money, you could potentially make some sound investment decisions that benefit you for decades to come.

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For many young people, their earliest investment advice comes from their business professors while they’re still in college. For this reason, GOBankingRates spoke with two business professors — Robert R. Johnson and Robert Bird — about the top investment tips they give their students. This is what they said.

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Invest Early and Often

As a student, you have a lot of life ahead of you, so use your time to your advantage.

“The biggest advantage someone can have in investing is time. Starting early is the key to successfully building wealth because of the effect of compound interest,” said Robert R. Johnson, Ph.D., CFA, CAIA, professor of finance at Heider College of Business, Creighton University and the chairman and CEO at Economic Index Associates.

“Too often, people say they will wait until they are making more money to start investing. Those who invest early and often are rewarded handsomely,” he continued.

Johnson gave the following example to illustrate this point:

“Suppose someone invests $500 per month starting at age 35 and earns 10% annually on their investments… They will have accumulated $1,139,662 by age 65. They will have made $180,000 in total payments and will have earned $959,662 in compound interest.”

Johnson gave another example to show the power of time  and compounding interest:

“Now, instead, suppose that same individual starts at age 25. By age 65, they will have accumulated nearly three times as much — $3,188,390. They will have made $240,000 in total payments and will have earned $2,948,390 in interest.”

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Do Your Due Diligence

Robert Bird, a professor of business law and ethics at University of Connecticut, tells his students to do their homework before investing in any company or asset.

“Be watchful for companies that are experiencing a public scandal or major lawsuit,” he said. “Such companies could have more problematic structural issues that underlie the sources of litigation that are not yet evident to the public.”

Say Yes to Free Money

There’s an old adage that goes: Nothing in life is free. But when it comes to investing, this doesn’t always hold true.

Another of Johnson’s investment tips is to participate in an employer-sponsored retirement plan, ideally one with employer-matching contributions.

“If one does not contribute enough in a 401(k) plan that has a company match to earn that match, one is basically turning down free money,” he said. “Many people put such a high priority on paying down debt that they do not participate in their company 401(k) plan.”

Maximizing your 401(k) contributions has the added benefit of lowering your tax bill.

Don’t Invest in Fads

Another tip from Johnson is to steer clear of fads like cryptocurrency.

“Investing in fads is a wealth destroying activity,” he said. “Throughout history, one can find examples of investing in fads and how that has turned out. For example, go back to the late 1990s and the internet bubble. Today, it is the crypto market and NFTs.”

According to Johnson, investing in crypto might be profitable at times, but it’s not a wise investment.

“I can think of few worse strategies than committing investment to cryptocurrencies. One cannot invest in the wide array of cryptocurrencies; one can only speculate,” he said. “There is no rational way to determine the value of bitcoin or any of the other various cryptocurrencies, as one can’t apply the tools of traditional finance to arrive at the intrinsic value — or true value — of the supposed asset.”

As he put it, investing in crypto is all about speculation.

“There is no way to value cryptocurrencies other than the greater fool theory — the hope that some greater fool will pay you more than you paid,” he said. “It is the consummate bubble, and investors should stay far away from cryptocurrencies, in general, and bitcoin specifically.”

Steer Clear of Innovation

By that same token, avoid investing in innovation unless you’re prepared to be disappointed.

“People believe that identifying a new trend and investing in it early is a path to riches. One need to look no further than the automobile industry to show this is not the case,” said Johnson.

He gave the example of how there were once two thousand automobile companies — during the first half of the twentieth century. But while many investors jumped on what they saw as an opportunity for riches largely ended up backfiring.

This is because, of those companies, only a few still remain. Not only that, but these same auto companies have lost quite a lot of value for investors.

“The problem with investing in innovation is that, too often, investors are overly optimistic about its potential,” Johnson added.

Invest in What You Believe In

Another tip Bird gives to his students is to invest in things that they believe in.

“Don’t hesitate to invest with your values,” he said. “Choose companies that you think will not only generate a strong return on your investment, but are also firms that work for the benefit of society.”

He also suggested investing in companies that are focused on the people and the planet, not just profits.

“Firms on the Dow Jones Sustainability Index have outperformed their counterparts on the S&P for at least the past five years,” he said. “What is good for the planet may be good for your bottom line.”

Don’t Try to Time the Market

While some people might argue that timing the market is the way to go, Johnson holds a different view.

“Many people who listen to and are guided by the 24/7 financial news services believe that the key to investment success is timing the markets — getting out of stocks before a decline and getting back into stocks prior to a stock rally,” he said. “Nothing could be further from the truth.”

Instead, Johnson’s investment tip is to create a long-term financial plan — and investment strategy — and stick with it. “One should dollar cost average into a diversified portfolio of common stocks whether the market is flat, rising or falling,” he said.

Take a Few Risks

While things like innovation should be avoided, Johnson did note the merits of taking some risks.

“Individuals need to be taught to invest for retirement and not to save for retirement. The surest way to build true long-term wealth for retirement is to invest in the stock market,” he said. “Mistakes begin early in life, and the biggest financial mistake people make is taking too little risk, not too much risk.”

One way to go about this is to invest in a diversified portfolio of common stocks over the long term.

“There is an old Wall Street adage that states, ‘You can sleep well or eat well,’” said Johnson. “You will sleep well if you commit funds to low-risk investments like money market funds or Treasury bills, but your investments will not grow substantially and may even have trouble keeping pace with inflation. You will eat well by consistently investing in stocks.”

Be Patient

Both Bird and Johnson advise their students to exercise patience.

“I encourage students to play the long game. Consistency and patience are the virtues associated with accumulating wealth over the long run,” said Johnson. This means staying in the market and letting compound interest work its magic.

“Invest slowly, carefully and for the long term,” added Bird. “Patience, even in turbulent markets, is usually rewarded.”

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