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The Daily Cardinal Est. 1892
Sunday, September 24, 2023

College 101: Market Madness

I want to start investing in the stock market. I have a little bit of money that I inherited from my grandparents, and I’m going to start a job when I graduate. So I have some money to invest, and I know that investing is really important to building wealth, so I’m ready to get started here!

What I want to know is: how do I get started with advanced investing? I want to know how to evaluate individual stocks, how to identify when the market is about to take a downturn, and how to short stocks, among other things. Can you help me?

There’s no doubt about it: when it comes to building wealth, investing is key. When you save money early in your career and invest it, you’ll enjoy the effects of compound interest: on top of the immediate profit of the interest you make, you’ll be able to reinvest that interest, allowing you to see even more interest the following year. This virtuous cycle makes money saved and invested early on worth more: in fact, a dollar saved in your 20s is worth $10 saved in your 50s.

But the stock market doesn’t go up forever. As a young investor, you can expect to see a few downturns in your day. This is why experts traditionally suggest that your portfolio become more conservative with time--the closer you are to retirement, the less time you have to recover from a downturn, and (therefore) the more you’d prefer to be insulated from that risk--even if that means being insulated from the big upsides of risky stocks, too.

Those are the basics, but you asked about advanced investing: buying individual stocks (as opposed to mutual funds and exchange-traded funds, investment vehicles that allow you to invest in multiple stocks at once and therefore limit risk), and even timing the market. Your passion is admirable, but you may want to be careful.

There’s no doubt that brilliant minds can make a fortune investing. But investing is a difficult game, and it’s hard to “beat the market” (a term that means earning more in interest than you would by investing in the market more broadly, such as through an index fund). And those who do try this tend to do it full-time--and with help. Take AlgoTerminal, for instance: they’re using complex algorithms to make smarter bets on the market. It’s tough--and, arguably, ill-advised--for individuals to compete.

Instead, unless you intend to change careers, it may be better to stick to doing what you do best while allowing finance experts to do what they do best. Trust a financial advisor to help you, or simply invest in index funds and mutual funds designed to track the market as a whole. Diversify with bonds (and keep things in a balance recommended by your financial advisor or another expert), and simply keep saving and adding to your investments. In time, this will grow you wealth safely. If you try to time the market, you’ll likely fail; if you try to beat the market, you’ll likely fail at that, too. You have the right idea, but don’t let your eagerness get you in trouble!

In short, keep things conservative--and basic--for now. If you have a real passion for this, there’s nothing wrong with reading books on finance and using a little bit of your cash to experiment with some individual stocks and strategies. But be very careful about how much of your hard-earned money you place on risky investments, and watch for things like shorting stocks, which can expose you to unlimited risk.

“It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” -- Warren Buffett

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