Let’s just say I’ve been around the financial block a few times. So forgive me if I paraphrase a hit you’d probably only hear on an oldie’s channel: as Mick Jagger famously observed, when it comes to securing your financial future, time is on your side.
As a current or aspiring medical school student, you have years of earning ahead of you. You have the opportunity to build a sizable savings account if you’re disciplined about saving. But you can use your time more efficiently and solidify your financial position if you take one other step: get into the habit of investing early in your career. Now wouldn’t be too soon, so let’s take a look at how—and why—you can create and implement a productive investment plan.
Take Advantage of the Years
Financial experts agree that long-term investing is a smart strategy. That makes common sense. The longer you keep your money in a savings account, for example, the more interest it will earn, right? But while saving is important —you should do so every month and build a cash cushion that’s at least twice your monthly expenses—savings accounts don’t earn a lot of interest. Even in the long-term, they won’t contribute much to your financial growth.
But long-term investing in stocks, bonds, and other assets will. History has demonstrated for 140-plus years that, every ten years, the stock market delivers an average return on your investment (ROI) of 9.2%. Certain investments have exceeded that rate of return. By investing in S&P 500 companies—Standard and Poor’s index of 500 of the largest publicly-traded companies—investors who’ve stayed in the market for then years earned an average of 13.6. Needless to say, that’s way more than you’ll earn by putting your money in a savings account. Even the best savings accounts pay less than 1% interest.
The Long and Short of It
Long-term investing in the stock market offers another important benefit. Stock prices go up and down daily. Whole industries will see gains and losses, too, sometimes in response to a piece of new legislation being passed or some global event that makes investors hopeful or pessimistic. It’s hard to predict what stocks will do in the short-term and, frankly, you’ll drive yourself crazy trying to. That phenomenon is called volatility in the market. But over the long haul, the data proves that the market isn’t that volatile. Long-term investment essentially reduces the effect of market volatility and helps investors manage risk more effectively.
The sheer number of choices investors face can be overwhelming. There are about 6,000 publicly-traded companies on US stock exchanges alone. The number jumps to over 600,000 when you include global exchanges. Deciding what to invest in can be daunting, but it’s certainly do-able. And you don’t have to do it alone.
There’s a classic rule of thumb many investors follow: invest in what you know. As a med student, you might start by investing in medical technology or pharmaceutical companies. But chances are, you’re also pretty familiar with snack foods and sneakers. One reason to invest in companies and industries you know is that you understand how they make money. It’s easier to understand how the news you read is going to affect those companies. It’s easier to recognize when a company is positioned for growth, like when those crackers you used to see only in fancy gourmet shops suddenly show up on the shelves at Kroger. Arguably, investing in what you know can keep you more engaged in your investment strategy, too.
But particularly for beginning investors, “name brand” stocks are prohibitively expensive. What’s more, the most lucrative opportunities oftentimes fall into more obscure, emerging categories, including some you’ve never heard of. Investing in a company when it’s small then watching it grow is the holy grail investors strive for. Making predictions and finding these companies—that’s what financial analysts and advisors do.
Where to Find Investment Advice
Once upon a time, only the affluent could afford investment advice. You needed a stockbroker to advise you and make trades on your behalf. And because brokers made money on commissions, most of them weren’t interested in working with small investors. The less you had to invest, the less money they were likely to make off you. But technology has changed all that. Nowadays, you don’t need a broker. You can do just as well with a robot.
Real live stockbrokers rely on technology to analyze the mountains of data they used to pore through on their own. They don’t rely on their own intelligence so much as they rely on artificial intelligence anymore. And a whole new species of advisors, who can access that intelligence more quickly and efficiently, are eating human advisors’ lunch. They’re called robo advisors and they’ve succeeded in democratizing investment opportunities as never before.
If you’re interested in working with a robo advisor, do some research. Check the advisor’s performance statistics: how well did they compare last year, for example, to the S&P 500 Index or Dow Jones Industrial Average? There’s one other critical feature you should look for. Be sure the robo advisor you choose is pledged to act as your fiduciary. A fiduciary is a person or firm—or robot!—that is legally bound to act in your best financial interests. You might expect that from any company in the business of offering financial advice, but many companies don’t make that pledge and may choose their own interests in the case of a conflict.
Can’t Habituate? Just Automate!
Habits aren’t easy to form. Most take months to take hold and some can take years. Don’t have the discipline to form a habit? Don’t want to wait that long? No problem. You can simply download the investing habit. There are dozens of personal finance apps on the market today that combine investment intelligence with automated banking and trading features. They offer a set-it-and-forget feature that allows you to earmark money every month, week, or even day for investment. These apps can make trades for you. They can periodically balance your portfolio for you—a task that human advisors charge a pretty penny for. And they make it easy to access a comprehensive view of your finances 24/7 from the palm of your hand. Some of these apps offer savings and free checking accounts—there’s a little bit of budget-shaving to be gained right there—but all allow you to link and view your external accounts from within the app. One popular feature that’s ideal for beginning investors is “round up” investing. Each time you buy something with your debit card, these apps automatically round up the purchase amount to the next dollar and invest the few leftover coins for you. So every time you buy a latte, you can enjoy it a little bit more, knowing you’re helping secure your financial future.
Most apps begin by asking you to take a short, simple quiz. These questionnaires zero in on how much risk you can tolerate and help you set your investment goals. For the time being, your financial goals may be modest and that’s perfectly okay! Some apps allow you to personalize your investment strategy further, giving you the option, for example, to invest in companies that meet certain standards of social responsibility. You can also specify the percentage of your investment dollars that are used to purchase bonds, mutual funds, fractional stock shares, and other individual asset classes. If you’re not sure, you can rely on the app to decide for you.
One other benefit that personal finance apps offer is education. Many integrate blogs, newsletters, tutorials, and other resources to help you learn about financial markets and investing. As you become more experienced, you can use your newfound knowledge to take more control of your finances and make independent investment decisions if you choose. But while you’re in med school, with so much of your attention focused on studying, you may just want to leave your app in the driver’s seat.
Figuring Out How Much to Invest
Financial experts often advise that you invest 10% and 15% of your income. But those experts have never reviewed your finances, have they? Many med students live on a shoestring until they enter their residency years and can’t afford to invest that much. (There are plenty of side hustles that can help boost your income, but that’s a subject for another article.) Before deciding how much to invest, make sure you have a clear picture of your finances. Tally up your essential expenses like rent, utilities, and groceries. Take a very close look at your credit profile. Your debt-to-income ratio is particularly important. Prioritize paying off high-interest credit card debt. You’re likely to lose more by carrying it than you would gain by investing. And your debt-to-income ratio factors mightily when lenders decide whether to give you a mortgage or help you refinance your student loans. The good news is, if you start to invest early in life, you will have plenty of time to make up for starting small once your career is up and running.