Budgeting – Page 5

It's never been easier or cheaper to invest in the stock market. Here are some simple guidelines that have helped me as a newbie keep from losing my shirt. 1. Don't borrow money to invest. Baby Step 6/7 is the time for building a portfolio of individual stocks. This means do NOT borrow money to buy individual stocks. In Baby Step 4, I teach selecting 3 non-overlapping funds in an Roth IRA like: VTSAX, VTIAX, VBTLX. Only after retirement was taken care of did I even consider investing in individual stocks. And it will remains about 10-15 percent of my total investments. Of course, capital gains can have an effect on this. This also includes trading on margin. While leverage can significantly amplify the outcome of a deal, that outcome may not be in the direction you had hoped. Can you say margin call? 2. Don't invest money you can't afford to lose. This leads into the second Don't. Never invest money you need to pay the rent. Investing is a long-term game. Like Warren Buffet, I am a buy-and-hold investor. If you need the money for next month's light bill, that's too risky. Why? Because the company you invest in could go belly-up! This reminds me of the story of a couple who invested their entire life savings an individual stock that the husband heard about at the barber shop. No due diligence. Just one big transfer from their safe mutual funds in retirement accounts to a single stock. The company? Enron. 3. Don't invest in things you don't understand. If you can't explain what a company does in two or three sentences to a grade-schooler, the investment may be too sophisticated for you. McDonald's and Coca-Cola are easy to understand businesses that are stable and probably good starter stocks. I also avoided derivatives like call and put options until I had been investing for well over a year. In fact, I'm still not keen on options. I understand the upside, but there is also a huge downside. 4. Don't expect to get rich quick. If I am not going to invest in a company for at least a year (if not five), I'm typically not going to invest in it. Have I ever done a swing trade? I recently made a quick gain with Delta Airline. But swing trading is highly unusual for me. And it's a sure way to get burned. Poor people are always swinging for the fence. I got my feet wet with some no-brainer investments, Microsoft and Intel. I do not own either of these today, but they were two businesses that were understandable to me. And I felt they were low-risk for me as a newbie. And don't expect all your stock picks to go up. Microsoft and Intel both went down shortly after I invested in them. But patience with investments is the difference between building wealth and staying poor. Remember that Babe Ruth did not hit a home run every time he was at bat. He struck out a lot. Warren Buffett has picked stinkers, so you will too. 5. Don't invest in less than 10 stocks. This is like putting all your eggs in one basket. Just as diversification reduces the risk of mutual funds, having multiple positions with individual stocks also spreads risk. The more stocks, the lower the risk, statistically speaking. Naturally, the idea with individual stocks is to select the very best 10-15. With a lot of due diligence and a little luck, I've managed to consistently beat the market with my stock portfolio. Remember that you already "own the market" in your retirement accounts, so eventually 15 stocks is enough to watch in your stock portfolio. And with services like Robinhood, M1 Finance, and Webull, you can buy fractions of a share. So spreading your initial investment among several stocks is not a problem. I use M1 Finance, and I can buy as little as one ten-thousandth of a share. 6. Don't focus on short-term gains. This Don't isn't always obvious. But if you're not living under a rock, then you've seen ads on YouTube (and elsewhere) from people hawking expensive courses about their "special" secrets on making money as a day trader. Truth be told, these individuals probably make more money selling courses than they do in the stock market! And for every "technical trade" these purveyors show was a home run for their students, I can show more where the candlestick patterns fails. Day trading is riskier than swing trading and significantly increases the likelihood of losing money in the stock market. Day traders are poor people tend to be swinging for the fences. It's like buying lottery tickets. If you want to avoid the nail-biting of watching the market every day, avoid day trading. You'll only worry whenever there is a dip. This usually leads the newbies to make emotional decisions about their investments. 7. Don't Buy Penny Stocks. Penny stocks are so-called because they, well... typically cost less than a dollar. And those who swing for the fence trying to get rich quick don't tend to have the stomach for huge paper losses. They usually sell and lose their money. Since there's already a tendency for noobs to buy high and sell low, they should stay away from day trading at all costs. Disclaimer: Although I have a degree in finance and have experienced success as an investor, these posts are for entertainment purposes only. I am not a CFP or a CPA. Consult with these professionals if necessary. Most importantly, do your own due diligence.

Mark Noldy

Category: Budgeting