slice of koh

I’m facing the same question myself.  The Dow Jones Index has reached levels not seen since I was in seventh grade.  Who thought that would happen?  The investor mantra is to buy low and sell high.  One would think this is a great opportunity for a young investor like myself.

Before you ever consider investing in the stock market especially if you recently graduated, there are five questions you should ask yourself before making committing your precious cash to this investment decision.

1. Do I need this money in the short-term? 

Short-term means up to the next two years.  If you ever think you’re going to need this money within the next two years, it is probably best to use other investment vehicles such as CDs or savings accounts.  This is especially important if you think you will be making significant changes in your life such as a new job, moving to another city, or going back to school.  If you think you can live without this money for the next two years, then you should consider investing in the stock market unless you answer “no” to the questions below.

2. Do I have any credit card debt or any other high-interest loans?

Unless you can make more money in the stock market than you borrow through credit cards and high interest loans, you should take that money and pay down your balances.  In all likeliness, recent college graduates will have one (or both) of the following federal loans: Perkins and Stafford.  The Federal Perkins loan has a fixed interest of 5%.  The Stafford loan also has a fixed interest rate depending on the academic year in which you borrowed the loan.  You can find these rates here.  Private loans tend to have much higher interest rates.   On the other hand, credit card APRs (annual percentage rate) tend to be much higher than federal and/or student loans.  If you are lucky enough to have parents who put you on their credit cards when you were in high school, it is more likely that the credit card company sees you as high risk and initially sticks you with a high APR.  Even though the stock market is at an all-time low, I don’t see it recovering anytime soon.  Instead of paying 10% extra on your credit card balances while possibly losing money in the stock market, you are much better off paying off those high-interest bearing balances as soon as you can.

3. Is my “rainy day” fund non-existent?

As a good rule of thumb, you should have a 6 months worth of living expenses sitting in a liquid savings account that is fairly accessible in case you are laid off or your circumstances change.  Depending on where you live and whether you are single or have a family, “6 months worth of living expenses” can vary.  You will need to be the judge on figuring out how much you should save for this “rainy day fund”.   It is also a good idea to discuss finances with your parents and/or significant other to have a game plan in case something happens.  With unemployment rates at a high not seen since 1983, I would definitely make sure you have a pile of cash on hand.  This is especially important if you have already invested in the stock market.  The last thing you want to do is sell at a loss because there is no other way to get cash.

4. Am I risk-adverse?

If you are obsessive-compulsive or have frequent nervous breakdowns about your finances, then you are not ready for the investing in the stock market.  Unless you work as a trader, it is unlikely that you will be sitting in front of your computer and tracking your investments while the markets are open.  It is more likely that you want to invest in something that you are comfortable with and watch your investment grow in the long-term.  This market is definitely not for the weak-at-heart as there seems to be no bottom for the Dow Jones Index.  

5. Is learning about investing too much of a hassle?

Investing is a commitment from not only your cash but from yourself.  By investing in stock, you accept that you are taking a risk and could possibly lose a lot of money (but can make a lot of money as well).   I always research the stocks that I choose to invest in and learn from my prior missteps.  I never read or hear what the analysts have to say about stocks because they’re about the same age as me.  The best way is to learn some basic financial accounting and immerse yourself in the financial reports released by the companies you’re interested in.  Just go to the Securities and Exchange Commission website here and go to “Search for Company Filings”.   You are looking for “10-k” or “10-Q” which are the financial statements.  Read what the executives have to say about their companies and judge for yourself whether the companies are positioning themselves for growth.

I still believe that investing in the stock market is a main tenet in securing your finances in the long-term, but you need to be smart about it and do your research.   After rent, transportation, utilities, credit cards, and student loans, it is hard for young twenty-somethings to save cash for the future.  It’s even harder to put away this hard-earned cash into a brokerage account.  Even though the markets are pretty terrible, this is definitely a blessing in disguise.  If you do have money that you don’t really need in the next two years, then it is definitely time to invest.