The recent up and down of the S&P 500, tensions over interest rates and a highly charged election year have many young, college-aged investors feeling confused and skeptical about their investment decisions. In these tumultuous times, students tend to focus on their emotions, attempting to time the market with unfounded assumptions about their favorite companies. This can lead unsuspecting students into speculative, frequent and impulsive trading. The reality is that these tactics are typically unsuccessful for young investors with developing brains, and they certainly are not effective for students working with limited funds and time.
UConn students and young investors should be focusing on long term investments with growth or value potential that they can confidently hold onto. This requires discipline, emotional control and a lot of research, but they provide a good basis for learning and a lower maintenance investment option.
Investors of all ages struggle with balancing influences of the head and heart. Some investors can become particularly attached to a company and hold onto it for far longer than they should. These investors often convince themselves that the company will recover or a miracle will happen. It usually will not. Other investors have the opposite problem: they are undereducated and too fearful to invest. This tends to be the issue that most students face.
Students new to investing can combat this by further educating themselves on the basic economic and financial concepts that guide the decision-making process. Whether choosing to invest in growth or value stocks, students need to understand the effect that Federal Reserve decisions, the business cycle and management politics can have on a company. Once they are comfortable with these concepts, they will be more confident in their investing decisions, even during periods of short-term uncertainty. Students must be willing to keep their emotions at bay during these times and refrain from pulling out of positions that are facing temporary headwinds. If they pull out, they could miss huge opportunities when the company inevitably comes out on the other side.
An example of this is with the household name Apple. In the 1990’s, Apple experienced a massive decline in sales and a failing management team. They were being crushed by Microsoft in the computer market, and it seemed like Apple was hopelessly fighting for salvation. An emotional investor would have looked at this situation and pulled out immediately. A more perceptive and stable investor would have seen a good company with poor execution. Apple had forgotten their purpose, only remembering when Steve Jobs returned as CEO. Apple is a good reminder that we can’t expect to see between the lines of every investment opportunity. Young investors should realize that while the future of a company can be influenced by its history, it is not the end all be all. young investors need to realize that while the future of a company can be influenced by its history, it is not the end all be all.
Choosing to focus on long-term investments is also beneficial to the development of student investors and can help them find their style. Students who invest based on speculation may have some general knowledge, but they lack the research skills and depth of knowledge that makes a smart investor. By diving deep into a few companies, student investors expand their knowledge about various industries and competitors that will ultimately make their research process more efficient in the future. As students learn about one company, they inadvertently learn about many other companies in that industry through market trend research and competitor analysis. This is a wonderful way for new investors to become educated quickly.
Ultimately, student investors have limited time and energy to spend worrying about how their investment decisions will work out on any particular day. It is much easier and stress-free to spend that time developing a convincing and research-backed investment thesis that is not vulnerable to sudden emotional impulses which might occur in the coming years. By balancing the emotional and technical sides of ourselves when investing, students can capitalize on both mathematical proof and their gut feeling, which is correct on occasion, allowing students to hold their positions for longer and realize great long-term gains.
