UC Davis professors and the the vice president of the Finance and Investment Club break down the terminology, steps and potential mistakes during the investment process
As students prepare to enter the workforce, financial literacy becomes a more commonly needed skill as investments have the capacity to impact one’s future.
Investing is a complicated process and is utilized differently by each consumer. Janine Wilson, an associate professor of economics at UC Davis, described investing as a long-term process that allows people to invest money in corporations.
“What you’re doing is letting people use your money to try and build businesses or ideas or new products,” Wilson said.
Natacha Jouonang, a second-year statistics and economics major and the vice president of the Finance and Investment Club at UC Davis, described that, for her, investing is a tool that allows her to plan ahead.
“For me, I am someone who likes to have foresight,” Jouonang said. “Investing to me means looking into the future and planning for the future, to prepare yourself for a later date.”
The first step in one’s investment journey is choosing a brokerage in which to place funds for future investments. Brab Barber, a professor at UC Davis’ Graduate School of Management, and Wilson, recommend investing in reputable providers such as Fidelity, Vanguard or Charles Schwab for low fees and a reliable brokerage.
In addition, Jouonang mentioned investment applications like Robinhood, Coinbase for cryptocurrency and Acorns. When choosing a brokerage, she emphasized the necessity of researching each one’s terms to ensure low fees and an understanding of their withdrawal requirements.
After opening a brokerage account, the following step is deciding how to structure one’s investment portfolio and in which sectors to place available funds. Sectors range from investing in individual stocks in the stock market, putting them into different funds or buying bonds.
Investing in individual stocks is a more individualized, studied process, as consumers place money into companies that they believe will grow in the future. Wilson explained that consumers aim to buy stocks at a low price and resell them when they are more highly valued. Jouonang prefers investing in individual stocks because she enjoys being involved in the investing process and making researched choices.
Wilson recommended having a diversified portfolio of stocks, bonds and funds. Bonds, such as U.S. government bonds, offer small, steady gains over time, whereas stocks can offer higher returns but come with greater risk.
“I have a stock portfolio which is in mutual funds, some in individual stocks and then I have bonds as well,” Wilson said. “As I get older, I will buy more and more bonds and less and less stocks because that way I know when I’m retired and not working I don’t have to worry about the market going down and me selling a bunch of stocks at low [values].”
Barber held similar beliefs and emphasized that savings for retirement and major purchases should not be dependent on individual stocks.
“For the core holding, I would just do mutual funds or ETFs [exchange traded funds],” Barber said. “I would not recommend individual stocks for the core holding.”
Both professors dissected what funds mean and how they differentiate from individual stock holdings.
“Index funds just take an index on the market either the Dow [Jones] or the S&P 500, and they just follow the index,” Wilson said.
She explained, however, that everyone who has invested in the index is following its daily adjustments, and if people panicked and sold their stocks then an individual’s holdings will go down. Therefore, she said, mutual funds may be a safer option since they consist of level-headed managers who monitor the funds and ensure that the invested companies are sustainable.
“Mutual funds are funds that invest in individual securities, and no more than 5% of the fund can be invested in any single security,” Barber said. “They have to have at least 20 securities and be diversified across the securities.”
He then contrasted mutual funds with ETFs and the differing results of each.
“ETFs are very similar except ETFs—exchange traded funds—will track an index,” Barber said. “They generally pick an index that they track, and a very common one is the S&P 500. An exchange traded fund on the S&P 500 will give you [its] returns.”
Comparatively, mutual funds can also index the S&P 500 but simultaneously can actively pick individual stocks. Though there are many options, an investor’s choices are determined by their purpose. When opening a brokerage account, clients have varied options on where to place invested money. For more stable funds, Barber and Wilson recommended more ETFs and mutual funds and placing those in a 401k or Roth IRA.
Wilson recommended people start as early as possible and invest in a Roth IRA, a retirement account that is tax deferred upon the removal of funds at the age of 59.5. Beginners, Wilson said, should begin saving 20% of their income in their Roth IRA account for compounded growth in the future. Once people obtain jobs with 401k retirement options, she recommends continuously investing funds in one’s 401k.
Wilson began with $200 from her summer job in college and began investing it, despite her hesitations that this minimal amount would accumulate significantly. When reaching her 30s, she was overwhelmed with the cost of having kids and a house and remembered glancing at her retirement account.
“I looked at my retirement account and it was real money,” Wilson said. “It was amazing to me, it was like magic had occurred.”
Ultimately, Wilson and Barber recommend diversified investing for a more stable outcome. The returns may not be a 90% gain, however having a portfolio with mutual funds, ETFs, individual stocks and bonds would provide for more stable growth.
Jouonang similarly believes in having a diversified portfolio, however she prefers individual stocks for more control over choices. She stressed researching stocks and underlined the need to invest in various sectors and industries within the stock market.
Finally, each person mentioned the necessity of making well-informed choices and not comparing one’s actions to others. Wilson mentioned that, like UC Davis students now, she attended college during a market boom and described the dangers of overconfidence in a saturated market.
“The moment someone said: ‘There’s no way you could lose,’ you know there’s a problem,” Wilson said.
She mentioned that you cannot predict how the market will work, and that people who win big are not special but lucky.
Similarly, Barber recognized the importance of self awareness and investment psychology. He mentioned that investing should be for long term growth and that interest in day trading should be framed as being a fun sport and not a savings technique. He stated that there are dangers associated with trading on a “hunch” and not thoroughly understanding one’s choices.
“At casinos some people win and it’s fun to win,” Barber said. “The problem is that in the stock market, you’ll think that it’s because you’re really smart where in a casino it’s [because] you know you’re really lucky.”
People get drawn into their unpredictable successes and draw a connection between their win and their knowledge of the market, according to Barber.
“There’s a story behind every stock, and if you pick a stock that goes up you can say, ‘I knew it was coming,’” Barber said. “When the roulette wheel hits red there’s not a story behind that. The stock market has both the gaming aspect and combines it with compelling stories.”
To counteract this trend, he mentioned the importance of investors not letting external attention and others’ opinions guide their decisions.
“Investing is like other good habits you want to develop,” Barber said. “You just need to do it regularly, and showing up is half the battle.”
Finally, Jouonang emphasized the importance of research and beginning the investment journey. She started in high school and researched enough to gain a grasp of the market.
“At least get your toes wet,” Jouonang said. “You can start with $5 and test it out. You’ll be surprised at how much you can learn from being curious.”
Some final tips from Jouonang include reading Yahoo finance to cover current events and metrics and using Investopedia to understand investing terms.
Barber recommends taking MGT 12Y, a lower division class that covers financial decisions, and being aware of future choices.
Wilson emphasized that she encourages individuals to conduct their own research prior to making investment decisions and summarized the necessity of financial knowledge and involvement.
“My takeaway would be: start young, save a regular percentage of your income—somewhere between 10-20%—make it consistent and make it diversified,” Wilson said.
Written by: Farrah Ballou — email@example.com