• Saahil Menon

Index Investing: The Best Way to Create Income During University

Updated: Jun 9, 2020

Studying, partying and sporting endeavors seem like the only three paths to take on during your university years, but where does making money stand?

If you plan on waiting to invest till you’ve got some free time to learn or after you get your first job, you’re missing out on the signs of substantial monetary gains in the interim.

As we've said before, if you don't start now, you're likely to never do so in the first place. Money only magnifies the person you already are, so if you aren't investing when you've got $500 lying around, how could you be doing so when you've got $50,000?

In other words, money is solely a tool that gives you greater opportunities to do more of the same thing, so you need to ensure that you’ve ingrained the investing mindset before you actually earn your high salaries. While that may seem like a challenge, here is a convenient way for uni students to start instilling that investing intelligence:

The Weapon: Index Funds

We’ve mentioned index funds here before, but this time we’re going into applicable detail and looking at some key examples to depict their benefits. Index Funds are a compilation of multiple stocks – sometimes even hundreds or thousands – and give you teenagers the opportunity to earn monthly income all from the comfort of your home. In particular, here are 3 key reasons to choose this asset class as your first form of investing.

a) Variety: A LOT of Variety

Index funds are the figurative candy store for beginner investors: in the same way a 6 year old is roped into NERDS, you need to be eyeing the possibilities of index fund gains.

There are over ten thousand index funds currently available to buy, each consisting of assets and industries that can accumulate the desires of any investor: high risk, low risk, tech, growth stocks, stable stocks, global stocks – infinite different combinations that you can choose from.

For example, consider David: A shy, conservative and introverted lad who prefers living life on the safer side. Good old Dave’s perhaps going to look at low-to-medium risk funds: which will be able to accommodate his risk-free appetite and still gain him a solid few bucks each month.

Low-to-medium risk fund: Vanguard Total Bond Market ETF

1 Year Performance: 8.97%

Return on $500 investment: $44.85

As depicted above, the performance of this index fund generally corresponds with Dave’s personality as an investor. Through the Vanguard Bond Market Fund, Dave was able to gain almost fifty bucks while he carries on with reading, studying, and venturing out wherever he pleases. Once more, a stellar depiction of the wonders that passive income can do.

Undoubtedly, $45 over a year may not be highly intriguing, but keep in mind that David is a very conservative personality with a low-risk appetite. The point to emphasize here is: even if you take virtually no risk at all, you can still be earning money. Money with almost no risk, no grunt work, and no time traded…what could be better for a conservative investor?

Contrastingly, you’ve got Donna, and Donna’s a wild one in the financial markets. For her, we’d be looking at a more attractive fund: one that’s invested into stocks with higher reward prospects.

Medium-to-high reward fund: Vanguard REIT ETF

1 Year Performance: Gain of 29.33% (vs 18.01% Gain in the Market)

Return on $500 investment: $146.65

Clearly, Donna’s investment into this Real Estate Investment Trust (REIT) yielded more fruitful returns and therefore matched her risk-averse nature. Over 8 months, she gained almost 150 dollars by working her money in an index fund – and even though it’s higher risk, some of that was mitigated because the fund is diversified. Here's where the beauty of index funds kicks in...

The fact that it was invested in different real estate markets allowed it to somewhat withstand market corrections: both during December 2018 and the moderate downturn in June 2019.

While macroeconomic indicators were bearish, the fund was well spaced into several real-estate markets, both on a local and global scale, which therefore protected it from plummeting as much as other assets. As a result, Donna was able to considerably beat the market, and gain income despite the whirlwind surrounding the financial markets. This is an example of creating a money machine for investors, allowing individuals to considerably profit in almost any economic environment: once more articulating the merits of index funds and passive income.

Overall, risk appetite plays a large role in which asset classes you can invest in, and the fact that index funds give you a pervasive choice of money-making mediums, you can be earning passive income no matter what your risk level is: anytime, anywhere.

b) Cost Effectiveness

While the benefits of index fund investments are targeted to university students here, this particular point is valid to the investor of any age: cost.

Everyone naturally seeks the cheapest alternative to the good or service they desire to obtain, and it’s no different when it comes to investing. Index funds are optimally beneficial because they can grow your income whilst simultaneously minimizing your costs: while traditional stock investing costs can be up to $8 per trade, the most effective index funds charge hardly 0.15% of your investment amount.

Over the long term, consider this hypothetical side-by-side comparison of the amount of money saved:

Source: (Vanguard, 2019)

Here, you can clearly see the effect of fees on each transaction in the long run, to the extent that they even supersede your earnings as a whole. Paying little-to-no fees is a critical aspect of maintaining your profitability and earnings over time: something that was substantially eye-opening to me and is greatly emphasized in Tony Robbins’ book, Unshakeable.

Within several months of discovering the impact of fees, I’ve already saved a substantial amount of capital by ensuring to look out for them and seek the most effective low-cost investments. With most index funds, high fees aren't a point of concern no matter which asset classes the fund targets, which is precisely why they are the most convenient investment for the everyday university student: you won't have to spend time inspecting or worrying about the different fee payments, it's one and done.

c) Exempted from Human Error

This is perhaps the most substantiated merit of index investing, because even though there are copious actively managed funds out there, over 84% failed to beat the market over a 2, 5 or 7 year period.

Mutual funds, Hedge funds, Money-market funds: these are all intriguingly sounding names, but remain solely names at the end of the day. When it comes to actually making money, none of these tend to supersede the gains of index funds.

To put it into a visual perspective, consider the figure above which depicts the beating rates of active funds in three of the most popular fund categories. Here, it's articulated that the majority of actively managed funds fail to beat the market, and of those few that do, it's not all sunshine and rainbows. Wait for the other shoe to drop: fees.

The effect of fees was emphasized in the previous section, and therefore highlights the fact that even if you profit from funds that are actively managed by professional investors, you still suffer the consequences of fees: rendering you sans profits in almost every scenario.

Hence, the conclusion here is that you're likely not to profit anyway with actively-managed funds, but even if you do, that gain is churned out by the outrageous costs of fund managers taking care of your money. This is inherently why index funds are the optimal method towards creating an income stream: a low cost, automated, and reliable form of investing your money.

Overall Sentiment:

We’ve established on multiple occasions that passive income is the key to wealth, and while there are countless mediums of achieving this feat, index funds do seem the most plausible.

The fact that they cater to the personality of any investor allows individuals to pick a way of growing their money that suits them the most. With over 10,000 fund options, the beginner investor is in the optimal place to choose their most complementing investment.

While index funds are suitable for adults too, the high risk-reward premiums and convenience of indexes make it the most applicable option for young adults. Rigorous workloads would cause university students to prefer not to go deep into the concepts of stocks, in which case putting your money into an index fund and letting it do the work is why it's the optimal way to grow your wealth in uni years.

Therefore, whether you’re risky, conservative, monetarily ambitious or simply looking for a new stream of income, index funds accommodate these desires and provide a compelling passive income stream while you study, party, and live your best life.

Start investing today, and grow your income from the comfort of your home!