Go for Broke[r]: A Beginner’s Trading Guide
Thinking about how to make those idle bills sing?
Salutations from the riveting realm of investing! Whether a penny-pincher or a high roller there is a plethora of ways to kick off your investments.
It’s a wild time for businesses and with choices such as robo-advisors and fractional shares, trading is more accessible to the public than ever. Given such, it felt a ripe time for this chronically apprenticed dabbler to offer out a guide on ways one might proceed!
We’ll cover a lot about individual trading, as it’s become a common starting place for investing beyond your standard 401k. In particular we’ll discuss risk, types of funds, when to buy/hold/sell, and industry speculation. Additionally we’ll talk in more detail about high risk handling and finish with the perks of opting with a brokerage account.
tl;dr it’s awesome to invest on your own, but takes hard work and loads of luck to outpace high-yield index funds or REITs. Consider local fiduciary firms for commendable yields with the bonus of handling emotional buffer.
Individual
Independent investing is a blast, but can be dangerous. It offers that gambler’s high alongside a welcome sense of control in an absolutely chaotic world. One pictures it like being her own little micro-VC, continuously vetting and re-vetting companies to aim for those few bombs that will offset the rest.
Unfortunately however, the average independent investor who manages all their dealings sees a paltry return of about 2% annually.
Back in 2016, when I had finally stopped living paycheck to paycheck I discovered a crisp $200 bill in my bank account. True to form, I instantly jumped on board the train to Robinhood (still hot at the time) and yeeted it into about 20 various pennystocks. I made a few beginners mistakes, particularly that I was spreading myself thin such that any big hit from a single company wouldn’t translate to as as huge a payoff.
Overall though I’ve had good success at ~31%/yr returns but strongly believe luck to be the greatest factor. No matter what you read or follow it’s important to know that no one can predict market trends with absolute confidence. As such it’s a good emotional buffer to keep in mind when debating whether or not to pioneer your own investment portfolio.
[1] Understand your risk level
If you do take the leap, the next thing to consider your risk levels. Take some time thinking about how your future might be impacted, and what hits you’d be willing to take. Then adjust your expectations to that.
This scope is important to maintain times of market volatility where high emotions might create poor decisions. Again, every advisor will tell you the market is unpredictable and all we are doing is working with educated guesses. So, high risk means you are willing to watch a majority of your money possibly shrink to nothing. Just like walking into a casino, only play with what you are willing to leave behind.
Try a risk assessment calculator if you are unsure of your risk level.
[2] Talk to people
If you have buddies who work for public companies hit them up and get their thoughts on how it’s looking. While insider trading is illicit, there’s nothing against talking to friends about the confidence levels of their company. Thanks to a tip from a buddy a considerable chunk of my profile consists of an early biotech IPO.
In a world where it’s impossible to have eyes and ears everywhere, some fire hits can really come from these. As in most realms, a strong network makes a huge difference.
If you aren’t in many circles that invest, r/pennystocks is an excellent example of online forums for checking out mutualistic and peer-reviewed opportunities.
[3A] Low Risk
If you are thinking of playing it safe, tried-and-true low cost investment companies such as Vanguard are never a bad way to go. They boast some of the highest return rates on index funds out there. Let’s review some options:
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Mutual funds — A way to diversify your portfolio with a “basket” of individual stocks or bonds handled by fund managers.
These fund managers take an expense ratio usually between 0.20-1.60% for administrative costs and management fees.
ETFs — Exchange-traded-funds. Very similar to Mutual Funds but ETFs tend to be bought and sold throughout the day whereas Mutual Funds are sold based on price at market close. Most ETFs are index funds.
Index Fund — An ETF or Mutual Fund that tracks performance of key “benchmark” players, e.g. S&P 500 Index, NasDaq Index, DOW Industrial Average Index. These are more passive investments. A haven for average investors.
[3B] Moderate Risk
This middle ground is where you want to outpace inflation returns through some periods of market volatility, but generally avoid going for those higher risk temptations. In here you could also go with higher risk mutual funds or ETFs.
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Real Estate —
With mortgage rates so low, there are some enticing investment opportunities in real estate. There is of course standard property purchasing which gives you the added bonus of owning something concrete, that can offer returns through rent and property value appreciation.
But for those who don’t happen have a down payment to a house straight chilling in their bank account, lesser known, but high performance options exist as well.
Real Estate Investment Trusts (REITs) are companies that own and operate income-yielding properties. By law they must distribute 90% of profits back to shareholders. As a perk, by redistributing such revenue these trusts are able to avoid standard corporate income taxes too.
The average U.S REIT equity has yields ~3.7% as of summer 2020, but you can also find some huge margin swings within sectors. The strong sell here is the 30 year consistency behind this making it one of the most robust options out there, especially if you do some homework on market predictions. A nice plus is that if you discover a local trust who’s development mission aligns, you can have direct impact on the futurization of your city!
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Convertible Shares —
There are other options such as convertible shares if you enjoy the idea of stocks, but want to play more on the safe side. A hybrid security choice, these exist for preferred stocks, and offer holders the option to convert to a fixed stock number after a set date, while receiving dividends in the interim.
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Robo-Advisors —
Robo-Advisors use algorithms designed by financial advisors and data scientists as an option to the public for automated investment. Developed in 2008 during the financial crisis, there are now over 100 services out there.
[3C] High Risk
This one is more my speed so i‘ll be going into a tad more detail.
First off, you gotta put the time in during the beginning. Not a ton, but a couple hours a week to get your feet wet.
Familiarize yourself with the industries out there. If you work for some you feel good about like biotech or renewable then all the better when it comes to making judgment calls! You want to be an early recognizer of success so read up on business and science trends from magazines like The Economist. Get the hang of googling a company’s history and learn to read how to markets react to quarterly earnings. Highly approachable apps like Robinhood are excellent starting territory as they aggregate advisor recommendation analyses down to a buy/hold/sell ratio.
Once you feel good on a few key areas, bookmark a list of good sources that watch for IPOs and company updates.
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Next, really try to condense those penny stocks. How many times have you heard people say “If only I put in more…” or “I nearly invested in that!”?
Hindsight, of course, is 20/20, but if you have a good feeling on something, go with it. Don’t divvy up your penny stocks. Condense on confidence. That way, when it hits big like you hope, you get a game changer of a payout vs a modest one.
This doesn’t mean you shouldn’t hedge those with other trades to offset the risk, but do so either with other stocks you have a good feeling on, or parcel out a safety buffer into one of the low or medium options above.
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Finally, keep that end goal in sight. You want to get where compound earnings work for you. Continue refreshing new prospects every month or so. Avoid frittering away dollars on inconsequential bric-a-brac and remember that investments now have significant value over investments later.
[4] Buy according to perceived value
“Price is what you pay; value is what you get” — Warren Buffet
Take it from Buffy, what we are essentially doing is shopping around. Whenever you buy something you are making a value call on that. It’s the same principle to keep in mind here.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Black Friday can happen when in the market too. We occasionally read about those giant dips in the DOW. Those are great opportunities to do a root cause analysis and consider whether or not those 52-week lows might rebound.
[5] Pick up on when to Hold and when to Sell
Cryptocurrency and specifically bitcoin, by nature of being basically the most volatile investment option out there, created a good deal of millionaires but also triggered mass sellers. In December 2017 bitcoin skyrocketed nearly 100% to $19k. Some still said HODL, others said it was a bubble that could rival Dutch tulips. And in true form, in response to big share holders selling, it rapidly plummeted, and kept plummeting, to a devastating $3500 less than a year later. Almost exactly 3 years later, it is once again sitting pretty at $19k.
The point is that there are some wild swings that you have to weather, and incorrect calls will inevitably happen. Be sure not to beat yourself up about it and just keep at it.
No matter what happens you should have a system to execute based on your risk. Some people configure limit shares to sell at a certain low or high automatically. Same for buying. Sometimes a company is heading downhill and there are early tells that you could pick up on to avoid a total loss. Other times that could be an opportunity to go in when a rally is right around the corner. 52-week lows are loaded conditions, and can be either a bargain or a bust.
[6] Quit while you’re behind
As a starter, the first year will likely have a lot of ups and downs, but even a green investor should expect to finish on the up.
If you are seeing negative net value it’s a good idea to consider what decisions led to such a turnout. It could be unfavorable diluting across pennystocks, reactionary buying and selling, or it could straight up be out of your control. As 2020 has shown, bad years happen, but recovery do come over time. The most important purpose to understanding root causes is that making drastic shifts in investing can staunch any deeper losses.
Certified Financial Planners
After coming into greater capital due to startup success I moved 90% of my independent investments to a Certified Financial Planner, specifically with my guy JB with Concierge Wealth Management. I can’t recommend these guys enough. What’s dope is that I can get a specifically curated portfolio to be socially responsible; no investments with certain morally questionable companies and a focus in alternative energy, education, health, and other progressive industries. These firms often have a suite of routes for you to take based on your preferences. And for an important distinction, the difference between a financial planner and broker is that a planner is fiduciary and assists with wealth construction, and a broker is non-fiduciary and more of an order taker and middle man.
Here are a couple of perks:
Perk 1 — The price model creates a trustworthy system. Many planners will earn a % profit off your portfolio, creating a nice mutualistic incentive.
Perk 2 — The consolidation of finances. At the point of my seeking a planner I had funds spread across 5 or 6 various e-trade accounts and robo-advisers. When I set up the wealth management account we moved nearly all of it into single, high risk, high return portfolio.
Perk 3 — No emotions over individual volatility. It’s a huge chunk of time to properly monitor all of your trades. And with every market shifts comes another rollercoaster of emotion. With brokerage accounts its generally hands off for the individual. They run the show, and that’s what you hire them for. If you change your mind on an ETF or want to revamp your portfolio you can do so. Generally I just keep fun money around in Robinhood to practice up on intuition.
Perk 4 — They do what robo-advisors can’t. As a robotics engineer, I hold a lot of love for automation in nearly all forms. There’s much to be valued in transitioning repetitive and consistent tasks to an automatically managed environment. But in the realm of nuance, I have reservations. Just as a master sculptor has refined every motion to a precise and delicate technique, so too is a vetted investor sensitive to the many subtle parameters and predictors that can signify market flow. Automated advisors need play on the safer side by nature of unfamiliarity, and thus a good starting option for those on the low end of starting capital. That’s not to say brokerages don’t employ automated techniques, the standard playbook of moves can be abstracted out for 95% of scenarios. But in those occasional and crucial estuaries of uncertainty, human experience can make the difference between a 7.3% and a 27% annual return.
And that number isn’t random. Despite covid absolutely rocking the markets this year, I am ending December 2020 up a whopping 27%. For transparency, I had just about the worst timing in history for kicking off investing. I signed up with the firm 2 months before the covid market crash! So while the success is (as always) in part to luck; socially responsible companies actually did quite well this year (yay humanity!), it is primarily a huge assurance that despite the most devastating crash since 1929, a reputable firm can deliver some huge returns.
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All in all, both options have clearcut trade offs, and are definitely not mutually exclusive. On one hand, it’s gonna be hard to beat expert forecasting networks and hand-picked reallocations. On the other, if you have strong industry-specific knowledge or a network of trustworthy people who recognize budding opportunities, individual investment can be a massive boon.
And always remember: the goal is high returns. Breaking even (rare) or negative can provide some hard lessons, but they can typically be avoided. If you are still unsure, remember, Idle dollars are dollars lost so safety nets are never a bad place to start out while you plan ^.^
~~Happy Trading~~
