This advice is part of an InvestorPlace series inviting academics from across the U.S. to share their thoughts on aspects of finance that new graduates should know. Their words have been presented with little to no editing. Today’s entry comes to us from Joshua Della Vedova, assistant professor of finance at the University of San Diego School of Business, who spoke with InvestorPlace via email about financial advice for recent graduates.
Financial Success Post-Grad
Live below your means, you can be functionally poor earning $50,000 per year or $500,000 per year. Those people you see in beachfront properties normally have big mortgages to go with them. Anyone can make themselves a financial prisoner if they make the wrong decision and pick up too much debt and repayments.
Anything you don’t spend you can use to build up your capital base and invest for the medium and long term. Moreover, this reduction in financial stress will be a key benefit of being financially responsible.
Today’s Investing Environment
The existence of highly speculative assets does not change the fundamental theories of finance.
Things like Dogecoin (CCC:DOGE-USD) and SPACs are just examples of new high-risk, high-return assets. There will always be room for investors with conservative and moderate risk appetites and of course the high-risk, diamond hand investors.
As much as people use Reddit as a source of information/education, it is just one source and should not be used in isolation. Ideally, Reddit may be a gateway for people to be more interested in the world of finance and seek further education or take part in the industry.
High-Risk Vs. Low Risk
When it comes to portfolio building, investors should consider themselves and their jobs as part of their portfolio. If you have a high-risk job (variable salary and uncertain future) such as an investment banker, these individuals may benefit more from less risky investments (bonds, cash and low-risk stocks) while a nurse with a stable position and fixed salary may benefit from much more risk.
Investors need to identify their investment horizon and diversify accordingly, an investment banker with a 100% leveraged position in cryptocurrencies may be one correction away from disaster.
Ultimately, it is key that you know your goals and your risk appetite so you can systematically structure your budget and portfolio to generate the means to live the lifestyle you desire. Unless you are only investing to gamble, high-risk novel assets should not be the sole piece of an investor’s portfolio.
One Sector For All? Or All For One?
I prefer to diversify across different sectors.
A common theme is for people to invest in their sector of work or in firms nearby their home (home bias). This plays out, for example, by people in the automotive industry investing in automotive companies generally, or their own employer specifically. This is not ideal, as if there is a crash or a disruption in the automotive industry you might both lose your job and suffer significant losses in your portfolio when you need the money the most.
If you have a well-diversified portfolio, you may then look at sectors in which you have a personal interest, be it energy, mining or technology.
You have to consider it like any other form of debt, you picked it up to build your human capital (education) which you are hopefully using to raise your lifetime income. I don’t believe the federal government will be canceling or acquiring student loans, I would look for the best rate, potentially refinancing them and pay them off in due time.
Employee Benefit Must-Haves
Healthcare is a must. As much as you may generate income from investments, your capacity to work is your greatest income-producing asset. Your body will, unfortunately, require maintenance, so good health care can at least relieve you of that worry.
Additionally, a good 401k plan, with an employer match, is a great way to build wealth into retirement. 401k/403b are tax-deferred, thus they are a great way to increase your lifetime net income as you will be drawing it down when you are older and in a lower tax bracket.
You can read the next installment of “Money Moves for Recent Grads” here, and find the entire collection here.