Get rich over time

For most SMU undergrads, financial planning means little more than deciding whether to use Visa or MasterCard for a purchase. After graduation, however, money matters become far more complex. Therefore, investment experts say college is the right time for students to start investing for the future.

“Being young, there is no reason not to invest in the market,” said Dr. Jeffrey Hart, a finance lecturer in the Cox School of Business. “Now is the time to get in.”

According to Hart, if a 20-year-old begins investing $10,000 per year at 10 percent annual interest, the annuity will be worth nearly $5 million at retirement. However, if the individual waits just 10 years to start investing, the value of the annuity at retirement shrinks to just under $2 million.

While some first-time investors opt to purchase mutual funds, Hart recommends they start with exchange traded funds because ETFs have lower taxes and fees, as well as greater buying and selling flexibility.

According to CNN Money, an ETF is like a basket of stocks. ETFs can track an entire stock index, a particular sector, or a bond index, while trading under a ticker symbol like a regular stock.

Hart says the advantage of buying ETFs is that the purchaser can maintain a diversified portfolio with only a handful of securities. It is important to maintain a diversified portfolio so that a hit to a single company or sector will not drastically impact the value of the portfolio.

Hart suggests that students interested in ETFs should visit the American Stock Exchange’s web site at www.amex.com. The site provides comprehensive information on the variety of ETFs available, including the popular tickers SPY, DIA, and QQQ.

According to Hart, SPY tracks the Standard & Poor’s 500 Composite Stock Price Index, commonly referred to as the S&P 500. The S&P 500 measures the performance of the most widely held 500 stocks.

On the other hand, DIA tracks the Dow Jones Industrial Average, which is a price-weighted average of 30 top blue chip stocks.

Meanwhile, QQQ tracks the tech-heavy Nasdaq-100 Index.

In addition to stock index-tracking ETFs, Hart recommends investors purchase bonds to further diversify their portfolios. Bonds are sold by the federal government, states, local municipalities, corporations, and other institutions to raise capital. The seller of the bond repays the buyer the principle amount plus interest at a specified later date.

Hart says the amount of a portfolio that should be invested in bonds varies with age.

“Whatever your age is, that is the percentage of your portfolio that should go into bonds,” he said.

Hart also noted that during the recent market slowdown, most investors who had diversified portfolios that consisted of stocks and bonds were not impacted as adversely as those investors who owned stocks alone.

Although the economy has slowed since the boom of the late 1990s, SMU economics professor Thomas Fomby believes the market is moving toward a secular low and that there are good investment opportunities.

“There is more upside potential than downside potential over the next year,” Fomby said, noting that price earnings ratios of stocks are moving more in line with their long-term historical norms.

In addition, Fomby sees the current low interest rates and the low rate of inflation as indicators of economic expansion.

With the market gaining momentum, Fomby and Hart agree that now is the time for students to start investing through dollar-cost averaging.

According to Putman Investments, dollar-cost averaging is the process of investing a predetermined amount of money into a single investment on a regular basis. By investing at set intervals, the average price of the accumulated shares evens out the highs and lows in the market because a dollar will buy more shares when prices are low than when they are high.

Hart suggests students purchase ETFs monthly or quarterly through an online brokerage, noting that the investment amount should be large enough to offset the typical $10 to $20 transaction fee charged by online brokerages.

He also recommends students investigate which brokerages will best fit their needs.

“Each brokerage has a different minimum deposit and offers varying degrees of advice,” said Hart.

One of the most popular online brokerages is E-Trade. According to their web site, the minimum deposit required to open an individual investment account is $1,000. After opening an account, investors can execute trades from $14.99 per transaction.

Ameritrade is a leading online brokerage firm, too. Its individual investment accounts require a $2,000 initial deposit and trades start at $10.99 per transaction.

Hart says students must carefully weigh how much they can afford to initially invest, as well as how much they can afford to regularly contribute.

“The stock market is a long-term investment,” he said. “You should only invest what you won’t need for the next five to 10 years.”

Senior finance major Chris Gerard has done that since age 16.

“I used some money I had in savings bonds and opened an Ameritrade account, and then I started trading,” he said. “It was easy.”

During the boom of the late 1990s, Gerard quadrupled his initial investment, but lost much of it after the tech slowdown. Nonetheless, he has still had a positive return on his money.

Gerard says he now maintains a well-diversified portfolio, due in part to the index-tracking funds he owns.

“My advice to a first-time investor is to diversify, diversify, diversify!”