Stocks, Bonds, and Real Estate

[DMO]

Does any one here invest money during college or med school?

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[Gleevec]

Originally posted by DMO
Does any one here invest money during college or med school?

I keep a bit in stocks, bonds, and mutual funds.

Real estate is pretty risky for people our age, unless you're made of money.

 

[Md 2b In TN]

How would you, what are you gonna invest loan money?

 

[28129]

Yeah.. Umm.. Most premeds don't have cash laying around to invest in the first place. It's not really worth your while unless you have a few grand to spare.

 

[lyragrl]

The difficulty with investing while accumlating debt is the issue of risk versus expected returns. Let's say you have a loan that accrues interest at a set rate (say 7%). Then if you invest that money in an equity mutual fund that has a (long-term) expected rate of return of 10%, you could theoretically out-earn your loan's interest rate. However, that logic falls apart when you think about the risk involved, since you take on a lot of risk for that potential return (in other words, the return isn't guaranteed and you could lose most of your money in the process).

I think there are some books about investing on a very limited income. There's one called The Wealthy Barber. If you are going to invest on a limited income with a lot of loans, then conservative investments (bonds or highly conservative and low-cost mutual funds) are probably among the better options.

Also, it never makes sense to invest when carrying a lot of credit card debt, since few investments have the potential to out-earn your credit card interest rate.

 

[thackl]

Maxed out my 401k for 7yrs and would be well over $100k if not for the **** economy. Also working on my 3rd house. Would I do it as an undergrad? No, unless I had money I didn't need.

 

[spumoni620]

yeah, got some in stocks and bonds, ira. regarding investing loan monies...if you have a long time horizon the risk factor is pretty much moot--in the LR the returns will be positive. however, lyragirl's argument does hold...you have to have somewhat of a high risk tolerance.

 

[PTjay]

I started a Roth IRA a couple years back. This is one of the best investment vehicles around for young people. If you don't have one, get one. A safe bet is an index fund because it follows the market which historically is the safest way to invest for the long term. Also, with an index fund none of your money is wasted on paying for advertising or for some manager because the stocks are selected in the fund and remain pretty much the same. In other funds that are heavily managed, a portion of your investment will be used for that person's salary and expenses associated with running the fund. The other nice thing about a Roth is that you are limited to $3,500 per year to put in. If you can't put that much away it's ok but you can never put more than that in a year.

PTjay

 

[lyragrl]

A Roth IRA is a great investment vehicle. If you invest in MF, then starting a Roth IRA at a low-cost shop is the best idea. Low cost shops include Vanguard, Dodge and Cox, Fidelity, and T. Rowe Price. On the load side, (that is, if you pay a sales fee for advice) the cheapest shop is the American Funds. Personally, I had a Roth IRA with Schwab, but the fees were so high for small accounts my husband and I transferred to Vanguard and Dodge & Cox instead.

PTJay is right that index funds are good options b/c they offer diversification and predictable portfolios. Not to harp on the risk thing too much but just keep in mind what your time horizon is. For a Roth IRA, where you're investing for retirement, a low cost S&P 500 fund can be a great anchor for your portfolio.

But if you're investing in a non-retirement account and you need that money soon (within 3-5 years), you should think really hard before investing the bulk of it in equities or an equity MF. For short term investing, a low-cost, high-quality bond fund (like an ultrashort fund) is a usually a better idea b/c your capital is preserved. The downside right now is that rates are very low, so your return probably won't be superb.

 

[Bridaddy]

lyragrl really makes a good point about not being able to tolerate risk with so much debt. With paying off debt, you can get a "guarenteed return" on the interest you aren't paying. If you owe 100K @ 5% and pay off 20K, you'll be saving 1K annually, no matter what other investments do.

I'm a firm believer in trying to minimize debt, live well below your means, and once you don't have to worry about debt, invest as much as you can comfortably do, for as long as possible. Some people I'm sure would rather invest while they pay off debt, I guess its just a style choice.

I can second the notion of paying of credit cards first, otherwise known as "legal slavery". I hate those companies who extend credit to people who couldn't possibiliy pay it back. Quite a few friends have gotten themselves into trouble.

 

[loomis]

i think that, as with regular IRAs, you need to have some sort of employment (taxable income) in order to participate. If i'm wroing..that would be great since you could contribute as a student..nice!

Originally posted by PTjay
I started a Roth IRA a couple years back. This is one of the best investment vehicles around for young people. If you don't have one, get one. A safe bet is an index fund because it follows the market which historically is the safest way to invest for the long term. Also, with an index fund none of your money is wasted on paying for advertising or for some manager because the stocks are selected in the fund and remain pretty much the same. In other funds that are heavily managed, a portion of your investment will be used for that person's salary and expenses associated with running the fund. The other nice thing about a Roth is that you are limited to $3,500 per year to put in. If you can't put that much away it's ok but you can never put more than that in a year.

PTjay

 

[jeffsleepy]

Yeah, I think you need a source of income to get a Roth... I'm not sure if it has to be taxable income however. I got a $500 stipend for some internship work and I think it counts. BTW, why is it good that you're limited to $3500 per year? Don't you want the option of putting in more? I have some money in a good index fund, VTSMX.

 

[thackl]

Originally posted by Bridaddy
lyragrl really makes a good point about not being able to tolerate risk with so much debt. With paying off debt, you can get a "guarenteed return" on the interest you aren't paying. If you owe 100K @ 5% and pay off 20K, you'll be saving 1K annually, no matter what other investments do.

For most people, you have to do both. Pay off debt and save at the same time. Most who try to pay off all debt before saving, never save anything.

 

[lyragrl]

Thackl,

I should have been clearer. Basically, what I was arguing was that you shouldn't try to invest loan money with the hopes of "outearning" your loan somehow. (Which was an original suggestion in the thread.)

I run into a lot of people in my work who have short-term investing goals and want to invest in highly aggressive investments to try and achieve those goals. That's usually a formula for disaster.

Certainly, if you're paying down a mortgage or school loans, you should invest for retirement. But it's also good to pay off credit card debt whenever possible, because the interest rate on credit cards is higher then the expected rate of return on almost any investment.

In terms of the other issue with IRAs, you do need earned income to invest in an IRA. If you make $750 in taxable income in a year, I believe you can invest $750 in an IRA--all the way up to $3500. I don't know about the situation with untaxed income--it's a pretty rare event. You'd probably have to ask an accountant or financial advisor.

 

[PTjay]

In response to why it's good that you're limited to $3500 in a Roth, I guess it's not really good but it's realistic for students who are looking to build a nice sized nest egg for retirement. As stated above this is a retirement account and you will be penalized if you take the money out before you reach a certain age but for those just starting with investing this is a MUST.