Time to read (using avg wpm): 10.5 mins
This is part 2 of Intro to the Stock Market, click here for part 1.
Okay we’ve been over what a long term investor can expect along with what vehicles are available to him or her. The rest of what we will be getting into is:
- Brokerage Firms
- Final Words
Love this stuff, let’s get to it.
There are many different strategies for investing in the stock market. Here will will go over a few basic starting points and then move on to personalizing your investing strategy.
Your first concern when you are picking your strategy is to decide your risk tolerance. Generally, the younger you are, the more risk you are able to take.
Understanding risk tolerance is key because remember that higher risk is usually proportional to higher reward.
What you decide to invest in, based on your risk tolerance, is called your asset allocation.
There are 4 strategies to asset allocation:
Conservative- About half in steady and safe investments, bonds and such, and half in higher growth potential assets, stocks and such.
Moderate- 1/3 in steady and safe investments and 2/3 in high growth potential assets.
Aggressive- 15% safe, 85% boom.
Very Aggressive- keep $10 in your wallet and put the rest into high growth investments.
Always have some savings just in case, whether you want it in the bank or in a mattress.
Now don’t just pick high risk because you are young or pick low risk because you are life experienced. Nothing is ever black and white and you should know that a high risk portfolio will probably make you throw up from time to time and a low risk portfolio may have you seeking more excitement in life.
If you can’t handle the risk tolerance you pick, change your strategy.
Once you have gauged your risk tolerance, considering your age and resilience, you will move on to personalizing your strategy. There are many ways to make your strategy fit your personality and below we can get into some of them:
(If you see a term that you don’t understand you can check out the Terms page I created for just such an occasion.)
Growth assets; stocks and stock focused assets (index funds, ETFs, etc…)
There are different classes of growth assets. All growth assets are not the same. Some can have a high risk but a low historical return and some can have a lower risk and a higher historical return. Some can be high risk high return or a lower risk and lower return, relatively.
Picking growth assets that are right for you is just as important as picking your risk tolerance foundation.
It’s just like a compass. It’s not always as easy as just going north. Sometimes you have to go north-east. Or north-north-east. Or north-east-east-east. You have to get specific to end up going in the direction you wish to go.
The same is true for your strategy. You may have an aggressive foundation but you still want to have some caution so all of the growth assets you may pick would have a relatively lower risk; like some blue chip stocks.
Or the opposite, you may have a conservative foundation but you don’t want to fall asleep so you pick growth assets that are higher risk.
(There are different metrics which help to approximate these characteristics, like standard deviation or the Sharpe ratio, and these metrics can also be found on the Terms page.)
Safe assets; Bonds and bond focused assets.
These may not be exciting but they are important. It’s not always about sprinting, the great long distance runners pace themselves. The ill-prepared sprinters can burn out.
Safe assets can be of the same nature as the growth assets; but, you may have noticed above that I said the word ‘relatively’ a lot. Risk, relative to a growth investment, is a different class of risk, relative to a safe investment.
A high-risk, safe investment can still be less risky than a low-risk, growth investment.
So this follows the same compass simile as above. Getting specific with your risk and reward under the umbrella of safe investments is important.
Little tactics to make you feel like an investing savant
Focusing is about investing mainly in a particular industry, versus diversifying over the whole stock market.
This only applies to you if you know the industry. Ex:
If you are in the tech industry and you have a strong feeling that the industry is increasing and you want to put a large focus of your portfolio into the tech industry; then you should.
Do not speculate. If you are not in the industry or you do not keep up with the industry then it is not recommended to focus your portfolio in it.
Theoretically you should grow your money at a better rate if you focus and predict accurately.
Diversify within your industry and have a few assets outside of your industry as well for some risk-management.
The market cycles. Bear and Bull. Being contrarian is all about buying when others are scared, bearish and not buying, and selling while everyone is excited, bullish and buying.
Theoretically you will be buying low and selling high.
If you are planning to be a consistent, long-term investor you will not worry about being a contrarian because you know you will see returns overall in the long-term.
A Stop-Loss or Trailing Stop-Loss
This is my favorite little trick.
When you buy an asset you can set a stop-loss so that if it loses a certain percentage or amount it will automatically sell. Or set a trailing stop-loss so that the percentage or amount moves up if the stock value goes up but stays where it is if the value goes back down.
Say you buy IDK stock at $30 and set a stop-loss at $25. Six months later IDK goes bankrupt and you freak out. You go to check and see that the stop-loss you set had saved you and sold the stock when it hit that $25 mark.
Or you buy IDK at $30 will a trailing stop-loss of $5 dollars. In six months the stock has climbed to $45 dollars. Six months later it goes bankrupt. Your trailing stop-loss sold your shares at $40 and you made a $10 profit on each share.
These can hurt you too though.
Say you use a stop loss on IDK at $25 and it dips below it, you sell automatically, and then it shoooooooooooots up to $200 a share. You automatically sold but you could have hung on and made some big bucks.
Just gauge your stop loss on each asset and consider your risk tolerance with each one.
I like to use stop-losses on volatile, high growth assets and trailing stop-losses on just about everything else.
You’re here to consider investing,
and it’s true that at times it is testing-
but just stick to your plan,
you must understand,
because money that grows is a blessing.
Choose Investing Limerlick, a limerick by Doug
End of intermission.
It is recommended to have at least 7 different assets in your portfolio.
It may take time to build these up but distributing risk is well worth it.
This is a little complicated and tax-y so we can’t really go over it in depth and if you are interested just do a little more research- but I’ll give you the rundown:
Essentially this is a way to get a tax break on realized losses. If you invest $100 in something and it loses $20, you can sell at $80, re-invest the money somewhere else and capitalize on your taxes with a $20 loss.
Do not be scared of this. This is actually pretty easy it just takes 20 mins or so of your time to research. I may do a post on this some time in the future.
This does not work in accounts like 401(k)s and IRAs because they are tax deferred.
For more check out:
I hate fees. Spend as little as possible. $10 in yearly recurring fees takes away so much when considering compound interest. Ex:
In the first post you were compounding at 10% and adding $100 a year eh? Now take away $10 for fees every year so you are adding $90 a year.
At $100 a year, 10%, 60 years it’s: $364,277.97
At $90 a year, 10%, 60 years it’s: $330,894.99
That’s over $33,000 dollars you lost out on because of your $10 a year fee.
Fees aren’t always avoidable but you should be cognizant of what they are doing to your potential returns.
IRAs and 401(K)s are tax deferred plans. If you are investing for retirement you should be under one of these plans.
There will be more on these plans in future posts.
(I think that, in order to tell you my strategy, I just have to have a disclaimer or something. I don’t have a lawyer yet so I’m not sure so I’ll include a disclaimer and keep it general.)
I do not recommend this strategy to anyone. Past performance does not indicate future performance. Participate in the stock market at your own risk.
I’m more of a long term investor. I want my money to be protected from taxes and have the ability to grow and compound until I’m retired.
I’m a lowly cook so I don’t have a 401(k) option, so I have an IRA. I try to put the same amount into my IRA every month.
I’m into this long haul high risk stuff.
My general strategy:
I like to have an ETF.
I like a REIT.
I like an Index Fund.
A couple big stocks that I believe in.
and I keep my eyes out for a crazy new stock that has died down from it’s IPO and I try to be prepared to more than likely loose all the money that I put into it, but just as well shoot into the sky with the “new google” or whatever.
I got no bonds.
These are the different places to sign up for in order to start investing.
There are pros and cons to each.
There are many different brokerage firms so I’ll only mention my top 3 and some of their characteristics.
I’ve got each one linked up to a review by NerdWallet.
You also could get a real, live, person broker. That’s what my buddy does. It works pretty well for him it seems but I don’t know much about it. I like the online structure because I think there are less fees and more control.
I use Fidelity. I started investing around two years ago or so and I was talking to my dad about which firm to choose and he used Fidelity so I figured I would too.
If I had to go back I have no idea what I would pick. I like all three of these firms.
These are getting more and more popular now-a-days. These services invest your money for you and use algorithms and proven investment strategies to grow your money.
These are called robo-advisors and they ask you a few questions and give you a risk assessment. Then they will give you a suggested asset allocation profile. Finally they will suggest that you use their service and have them take care of it all for you.
They charge a management fee, usually between 0.15% or 0.35%
Here are the 2 leading robo-advisors right now
These really seem like great options to me. I like to do it myself but if you decide to do it this way then I think you could still get your money’s worth.
Many great investors suggest you change the way you think about investing. They say to think about your monthly investing deposit as a bill that you have to pay. Pay that bill first- before all of your other bills. The investing bill is the most important bill because you are paying yourself- and you should pay yourself first.
Investing may seem scary at first but as a whole it’s not terribly complicated. Just a few hours of research and you can get your money to work for you. It’s just like job training- but this job will make you a millionaire when you retire.
Compound interest is the distinguishing principle of investing and our boy Einstein (smart guy), had a quote about it:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
I love this podcast; can be for advanced and beginner investors:
So what’s your investing strategy?
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