Wave the red cloth in the air.
Now move to the left…noo…wait, move to the right. Left again. A little more left.
Open the gate, move to your right, keep waving the red cloth…
Aaand, you got the beast locked in. Perfect!
[Ya, if only financial markets could be tamed by a red cloth]
After succinctly exploring the details of financial markets basics in an earlier post, I thought we could continue reigning in this wild beast, and see if we can ride it to financial freedom. Just kidding! Because, I mean you can ride the markets, but it may not necessarily take you to a cushy financial horizon. Why? Because:
a) You can never beat the markets due to systematic (or market) risks that cannot be controlled
b) You always need to be diversified (although I know of an individual investor who invested all his savings into one single stock – financial suicide!!)
So, let’s explore some of the ways we can pursue creating a component of our wealth in the stock market. The way this post will be broken down is:
- What do you need to get started, and busting some myths along the way
- What resources you can leverage to help with your research and analysis
- Where can you go to open accounts, and a quick grid to help you with cost comparisons
- Rules of Thumb (not some trendy pointers, but classic strategies to keep in mind)
Let’s get rollin’.
I know this may seem as common sense information, but boy, can you be wrong on this simple assumption. Truth be told, it is in the basic simple details that we get lost. So, no assuming-shassuming here, I will beat the drums of “heard that one before” and you won’t even know it. Aha!
As I type up this information, my Investments class from college comes to mind. I had a wonderful professor, who talked about investments in a very “real” way. His enthusiasm for the finance world was contagious. He used to constantly tell us to look around ourselves and understand what products, what services, what problems were being fixed by what types of companies. This was a simple way to narrow down the choices for stock selection. How? Well, if your friends/grandmother/cousins/aunts all shopped at CVS for their pharmacy and other household items needs, and you then found out CVS stopped selling cigarettes at its stores because “it cared” about the people’s health – you would put the two and two together and analyze that CVS is a company that provides a) great prices on products b) wonderful shopping experience c) focus on customer’s health at the cost of losing trillions of dollars in revenue – then you should buy this stock.
So, to get going on the stock market brigade, you need to have ready access to the funds you will be investing (I will be sharing minimums on accounts in the following sections), all your supporting documents downloaded in a folder on your desktop for opening an account online, clear idea of the stock you will be investing in, and purchase price that you are targeting for it. Most trading platforms settle trade the same day, but you do have the option to set rules on when the trade order should kick in.
And, here’s slayin’ some myths like a Truth-Lover and sayin’ like it is:
X! You don’t have to be a millionaire to invest. Some trading platforms have $0 minimum to get started
X! You don’t only have to invest in stocks. As individual investors, you can diversify your portfolio to cushion your portfolio against market drops and bumps
X! You don’t need to follow the advise of a paunchy grey haired man in suit. You can be your best guide, and do kick ass research on your own (please see the next section)
X! You don’t have go OCD on your investment accounts. Meaning, you don’t have to check the accounts fanatically every day and change your holdings based on the news of the day. Nooo! Nooo! If your goal is to create long term wealth, and your portfolio is balanced (or even on a growth), you can check in every month or even every other month.
Typically, this section comes in at the end, but it didn’t make sense to me. For investing, and for making smart decisions, especially if you are starting new or even starting afresh, you need to have an arsenal of tools and resources in your back pocket. Here are my top three (trust me that’s all you need)
- Yahoo! Finance: The storehouse of historical and current financial data and news. When I was an equity research analyst, I religiously used Yahoo! Finance to fuel my research. You can create simulated portfolios to see how adding/removing a particular holding will affect your portfolio.
- Investopedia: The Wikipedia of investing. You can find courses such as Stock Investing 101, Options Trading Basics, etc. for free. My go to whenever I am stuck with a concept
- Morning Star: Another research website, with news, fund information and ratings. It also has a good set of tools to get started on.
I decided to create a quick cheat-sheet style grid, so you can weigh in your priorities and the options available: click on it to enlarge.
Once you understand your financial goals, you can go ahead and make a selection that works for you. Oh, and just make sure you dig up a bit more on broker fees, tax on capital gains (if you trade on a short term), fees specifically for MF/ETFs that could potentially eat up your profits. I consider you very intelligent and obedient students, so I assume you will do your homework before blindly following the recommendations.
GOLDEN RULES OF THUMB
I always wondered where the phrase “rules of thumb” came from. I mean, why thumb? While I continue to wonder on this, here’s a list of (again very common sense) rules/ideas/pointers to keep in mind as you journey on your investing adventures.
Note: Some of these rules are written in numerical fashion, Rule of 72, Rule of 144, yada yada- and my view on them is blech! So I took the liberty to talk about rules that make sense at a very basic primordial human level
- Buy low, sell high – right now the market is hot hot hot. So unless you used the magical powers of resource I listed above, make your move cautiously. Listen, it takes time and practice to understand the rhythms of markets, so don’t sweat it too much. Chances are, by the time you get to this point, you are ready to invest!
- Invest in companies that you understand (look at the CVS example I gave above) and when you invest, consider yourself buying a slice of that business
- To determine how much of your portfolio needs to be in equities (stocks), just take 102 and subtract your age from it, the difference is the % allocation (say, you are 35, then if you do 102-35 = 67%). Why? Because while you are young, you can handle a bit more volatility in your portfolio, which can also generate high rewards, such as dividend income, stock price surges through economic cycles, etc. Oh, and because of increase in life expectancy, the old number of 100 was bumped to 120
- Don’t follow the tips by your friend’s uncle who claims to be investing for years. Do your own research
Ok, I just need to streeetch my fingers, and do some moves….this was a lot!
Bottom line: Investing is not for everyone, but if you have been sitting on the periphery, watching others do their thing, I truly hope this lil’ post can give you tools to move forward. [But, you know, by no means I am claiming to have all the answers or be an expert or CFP or other silly acronyms. I am writing based on my own research, experience and understanding].
Go, get that beast already!!