My father has never been much of a self directed investor. For most of his life he's had a money guy, but now that he has a lot of free time on his hands he's slowly been coming around to the idea of managing an account personally. I wrote him this short primer to help him navigate the world of investing, but I realized that it might be valuable to some other new people here on TradingView. I'ts super simple and skips over a LOT of complexity, but I still think it will be useful to him and in some way to all of you. What follows is the note I sent him:
''
Hey! Just wanted to write you a set of instructions to set you off right on the start of your personal investing journey.
The first thing you should do is visit interactivebrokers.com to open your very own IRA brokerage account. Opening a personal brokerage account is very similar to opening a bank account, in that you will need personal information, including your name, date of birth, social security number, drivers license etc. to open it. In the account opening process, make sure that you are opening an ‘IBKR LITE’ account, as opposed to an ‘IBKR PRO’ account. This separation delineates the pricing scheme Interactive brokers will use for your IRA account. The ‘PRO’ account charges higher commissions and charges data fees, but offers more options for trade execution and pays a higher rate of interest. You don’t need this - stick with LITE.
I’m advising that you use Interactive Brokers for several reasons.
First, you will get paid interest by Interactive Brokers on your uninvested balance, very much like how a bank account would pay you interest. The rate is very good. Basically no other retail brokerage firms do this.
Secondly, they are the most reliable. In the event of heightened market volatility, it’s important that you be able to transact in the financial markets should you see fit to do so. Just this morning as the markets gapped up on vaccine news and the Biden win, and Charles Schwab, Fidelity, and TD Ameritrade had outages and customers couldn’t see their positions. This could potentially represent a huge risk to you - stick with IB. They are the best.
Thirdly, they offer the broadest range of investment vehicles available to retail traders. You can trade everything from Japanese Yen to Nigerian Treasury Bonds to Apple stock all from the same account. This flexibility is great.
Finally, they are the cost leader. Market data is free, Trades are extremely low cost (if not free in most cases), and the outstanding fee structure is very favorable compared to other firms. Simply, you will pay the least at IB out of all of the available options, which means more $$ in your pocket.
Now that you’ve opened your brokerage account, you will need to fund it. They will normally have instructions for how to go about doing this, but you will essentially need to link your bank account to your brokerage account electronically in order to transfer funds between the two accounts. This is simple enough, and feel free to give me a call if you need help figuring out what they want you to do.
At this point, you should have your account open and funded. Great! Now you need to figure out how you will invest your capital. This process can be as straightforward or complex as you make it. In the following paragraphs I will attempt to lay out some of the common approaches investors take.
Without Further Ado, here are some of the most common investment styles:
Investing Style 1: Buy every stock in the S&P 500 through an ETF, or “Exchange Traded Fund”. An exchange traded fund is a legal entity that trades on a stock exchange that holds interests in various stocks and other financial instruments. The most popular ETF is known as “SPY”, and it holds shares in all 500 companies of the S&P 500 index. When buying SPY, you’re essentially buying the 500 biggest, healthiest, and most profitable 500 companies in the United States. This is a highly common investment strategy as U.S. Large Cap (Big Companies) Stocks have historically been one of the best asset classes to be invested in for the long term. If you’d like a large amount of diversification but think that buying the 500 biggest companies is too broad, there are ETFs for investing in specific sectors / strategies, like buying Bank stocks, Technology stocks, or Utility stocks, among others. I can talk more about the ETF options available to you if you’d like to know more.
Pros:
Low time commitment - buying stocks and holding them doesn’t take much research or time commitment. Your fortunes are tied to the U.S. Economy and you don’t need to keep up to date with the markets.
High level of diversification - you aren’t putting all of your eggs in one company basket, so to speak.
Good historical performance - over the long, long term, few active managers are able to outperform the S&P 500. Never invest in a Mutual Fund again.
Easy - there’s no thinking required.
Dividend - the SPY exchange traded fund pays a 1.62% Dividend Yield, which is more than 30 year U.S. Treasury Bonds are paying.
Cons:
Expense Ratio - Owning the SPY exchange traded fund will cost you 0.09% a year. While much MUCH lower than the diversified mutual funds of old that used to charge upwards of 1%, any costs you pay to own assets will prove to be a drag on performance.
Macro Risk - While your personal wealth may not be tied to the fortunes of a handful of companies, your investment performance is broadly based on the U.S. economy, which is cyclical in nature and (as we saw in March) can have sharp and nasty risks associated with it. Buying the S&P 500 for an ‘expensive’ price or at the wrong time could lead to years of flat or negative performance
Boring - Gives you no opportunities to flex your financial / operational know how and expertise.
Single Stock Risk - Paradoxically, a handful of companies have grown so large in size that they comprise a non-insignificant amount of the S&P index. When you buy this collection of 500 stocks, in reality almost 1 in 4 dollars is going to be invested in Amazon, Apple, Facebook, Microsoft, and Google. Not as diversified as you thought, huh?
Investing Style 2: Buy Bonds, either on their own or in conjunction with equities (stocks). Bonds have been around since the dawn of time, and simply, they are an agreement between one party and another to borrow money at a specified interest rate over a defined length of time. Upon the completion of the term, the principal of the loan is repaid along with the final interest payment from the borrower to the lender. Historically, Treasury, Corporate and Municipal bonds have provided a strong counterbalance to equity portfolio’s more volatile performance, yielding a solid, if unremarkable, return. Buying bonds that are mispriced (the borrower is good for the money but the bonds are trading below their ‘par’ or ‘principal’ value, has proven to be a winning investment strategy.
Pros:
Low Volatility - Investment grade bonds are a stable investment that is EXTREMELY unlikely to lose any value.
Consistency - no matter what happens in the world, the interest payments keep coming.
Low maintenance - Buy and forget
Income from Municipal bonds is typically tax free.
Cons:
The total return profile on all types of bonds right now is VERY low. 30 Year Treasury bonds are paying a measly 1.57% annual yield (as of writing), and Investment Grade Corporate debt doesn’t pay much more than that, paying up to maybe(?) 4% annually.
Inflation Risk - Buying a bond involves forking over your cash now in return for interest payments and the return of your cash years from now. In that time, inflation occurs, so your principal has less purchasing power when you get it back. If inflation is high enough, this effect may completely erode and even overpower the interest payments you are receiving, so that you’re actually just locked in to lose money over time.
Interest Risk - The Federal Reserve has set the target federal funds rate to 0%. This means that all bonds you buy now will be priced with that interest rate in mind. If the Federal Reserve decides to raise interest rates tomorrow, you will likely be able to get a much higher yield from bonds. In layman speak, from an interest rate perspective, you would be buying bonds at the worst possible historical price.
Opportunity cost - almost any other asset would earn you a higher return.
I would highly caution you against purchasing bonds as they pay you next to nothing for the interest rate and inflation risks you are taking on. Even municipal bonds that pay out income tax free have an incredibly high opportunity cost. What pays more - a stock that pays a 10% dividend with 15% long term capital gains tax, or a municipal bond paying 3% tax free?
Investing Style 3: Personal Portfolio Construction. This approach involves researching companies, allocating capital, and purchasing a diversified group of companies that you like and are prepared to hold for the medium - long term. Typically, a portfolio with more than 25 individual stocks is considered statistically ‘diversified’.
Pros:
Free. Your assets are yours and don’t charge a management fee. In fact, many of them pay you to own them.
Efficient - You could buy all 500 of the companies in the S&P 500, but who says 250 of them are any good? By choosing how to allocate your capital into companies that you think will be excellent investments, you reduce ‘dead capital’, or money invested into companies you don’t think present a compelling opportunity.
Precise Control - you are able to control your precise position sizing which allows you to control your risk with a high degree of confidence. You can deploy your capital appropriately into companies based on their individual risk / return profile.
Higher return - The studies discussing how active management is beaten in the long run by buying the S&P are talking about mutual fund managers who have very little flexibility when it comes to their investing process. Typical successful retail investors can easily earn returns >20% annually with a disciplined investment selection / timing process.
Interesting - (To me at least,) Being involved in individual company research and general market dynamics makes you much more aware of the world around you and will make you smarter + more engaged in your daily life.
Cons:
Responsibility - You and you alone are responsible for your investment performance. While this is always true, with any other strategy you have ‘plausible deniability’ when it comes to blaming something or someone else for poor performance. I remain convinced that people continue to retain the services of financial advisors for this precise reason - they want someone to blame when the shit hits the fan and they want to disassociate the responsibility involved in their personal finance decision making.
Time investment - Researching and learning about the markets, sectors, and companies takes some time, and staying up to date with your investments takes a continued (if brief daily or weekly) commitment. If one of your stocks warns about its ability to generate profits in the future, or other somesuch, you need to be aware of that information + be able to act on it in a timely manner.
Investing Style 4: Active Trading. This involves active participation in the financial markets, continuous analysis of the market’s opportunity set, and constant portfolio management. Active trading essentially looks to take advantage of short - medium term price dislocations, patterns, and opportunities within the financial markets, and take trades that look to capitalize on those situations. I would describe this as what I do for a living.
Pros:
Fun - I love what I do! I’m constantly learning, being challenged, and realizing my ideas in real time.
Rewarding - The return profile of a successful active trader is much, much higher than the typical performance of a basket of stocks.
Cons:
Volatile - While the constant adjustments that a typical trader makes should theoretically decrease volatility, increased awareness and precision allows a higher level of leverage, which presents similar or even increased portfolio volatility.
Time intensive - This is my full time job. Keeping up with the markets and all relevant news and opportunities takes a significant time commitment.
Hard - Learning how to actively trade can take a long time (5 years in and I’m just now starting to get it), which in turn can discourage new traders and active portfolio managers from continuing along the path to eventual success.
Personally, my active management style involves trying to accumulate as much stock as possible at as low a price as possible, so I can earn dividends, yields, and capital appreciation, and then distributing those shares as they increase in price. Most companies have some sort of fundamental ‘fair value’ based on their operations and the industry they are in, and I look to find stocks where the ‘fair value’ is very different from the stock price, so I can then take advantage of that difference, and get paid to hold the stock in the interim. I’d be happy to discuss much more in detail if you’d care to know about it as time goes on.
So there you have it… the most common methods of trading in personal brokerage accounts.
I just wanted to get you off and running on the right foot so you could make a solid decision about how you want to approach this challenge/opportunity.
I’ll leave you with a few companies I think are probably worth your further acquaintance:
T - AT&T
SLQT - SelectQuote
UNFI - United Natural Foods
STOR - STORE Capital
BP - British Petroleum
INTC - Intel Corp
NYCB - New York Community Bancorp
SHOP - Shopify Inc
AM - Antero Midstream
I’ve picked these companies because I think that learning more about them might serve as a solid basis for learning about companies in multiple different industries, as well as the fact that I think they would also make decent investments at this point in time. The bolded letter(s) before the company name is called a “Ticker”, and it’s how company stock is organized on the exchanges. Investopedia and Yahoo Finance are two great free resources for learning almost everything you need to know about company specifics and the financial markets in general. The book “Trade Like A Stock Market Wizard” by Mark Minervini is also incredibly valuable and worth a read.
Cheers!
''
''
Hey! Just wanted to write you a set of instructions to set you off right on the start of your personal investing journey.
The first thing you should do is visit interactivebrokers.com to open your very own IRA brokerage account. Opening a personal brokerage account is very similar to opening a bank account, in that you will need personal information, including your name, date of birth, social security number, drivers license etc. to open it. In the account opening process, make sure that you are opening an ‘IBKR LITE’ account, as opposed to an ‘IBKR PRO’ account. This separation delineates the pricing scheme Interactive brokers will use for your IRA account. The ‘PRO’ account charges higher commissions and charges data fees, but offers more options for trade execution and pays a higher rate of interest. You don’t need this - stick with LITE.
I’m advising that you use Interactive Brokers for several reasons.
First, you will get paid interest by Interactive Brokers on your uninvested balance, very much like how a bank account would pay you interest. The rate is very good. Basically no other retail brokerage firms do this.
Secondly, they are the most reliable. In the event of heightened market volatility, it’s important that you be able to transact in the financial markets should you see fit to do so. Just this morning as the markets gapped up on vaccine news and the Biden win, and Charles Schwab, Fidelity, and TD Ameritrade had outages and customers couldn’t see their positions. This could potentially represent a huge risk to you - stick with IB. They are the best.
Thirdly, they offer the broadest range of investment vehicles available to retail traders. You can trade everything from Japanese Yen to Nigerian Treasury Bonds to Apple stock all from the same account. This flexibility is great.
Finally, they are the cost leader. Market data is free, Trades are extremely low cost (if not free in most cases), and the outstanding fee structure is very favorable compared to other firms. Simply, you will pay the least at IB out of all of the available options, which means more $$ in your pocket.
Now that you’ve opened your brokerage account, you will need to fund it. They will normally have instructions for how to go about doing this, but you will essentially need to link your bank account to your brokerage account electronically in order to transfer funds between the two accounts. This is simple enough, and feel free to give me a call if you need help figuring out what they want you to do.
At this point, you should have your account open and funded. Great! Now you need to figure out how you will invest your capital. This process can be as straightforward or complex as you make it. In the following paragraphs I will attempt to lay out some of the common approaches investors take.
Without Further Ado, here are some of the most common investment styles:
Investing Style 1: Buy every stock in the S&P 500 through an ETF, or “Exchange Traded Fund”. An exchange traded fund is a legal entity that trades on a stock exchange that holds interests in various stocks and other financial instruments. The most popular ETF is known as “SPY”, and it holds shares in all 500 companies of the S&P 500 index. When buying SPY, you’re essentially buying the 500 biggest, healthiest, and most profitable 500 companies in the United States. This is a highly common investment strategy as U.S. Large Cap (Big Companies) Stocks have historically been one of the best asset classes to be invested in for the long term. If you’d like a large amount of diversification but think that buying the 500 biggest companies is too broad, there are ETFs for investing in specific sectors / strategies, like buying Bank stocks, Technology stocks, or Utility stocks, among others. I can talk more about the ETF options available to you if you’d like to know more.
Pros:
Low time commitment - buying stocks and holding them doesn’t take much research or time commitment. Your fortunes are tied to the U.S. Economy and you don’t need to keep up to date with the markets.
High level of diversification - you aren’t putting all of your eggs in one company basket, so to speak.
Good historical performance - over the long, long term, few active managers are able to outperform the S&P 500. Never invest in a Mutual Fund again.
Easy - there’s no thinking required.
Dividend - the SPY exchange traded fund pays a 1.62% Dividend Yield, which is more than 30 year U.S. Treasury Bonds are paying.
Cons:
Expense Ratio - Owning the SPY exchange traded fund will cost you 0.09% a year. While much MUCH lower than the diversified mutual funds of old that used to charge upwards of 1%, any costs you pay to own assets will prove to be a drag on performance.
Macro Risk - While your personal wealth may not be tied to the fortunes of a handful of companies, your investment performance is broadly based on the U.S. economy, which is cyclical in nature and (as we saw in March) can have sharp and nasty risks associated with it. Buying the S&P 500 for an ‘expensive’ price or at the wrong time could lead to years of flat or negative performance
Boring - Gives you no opportunities to flex your financial / operational know how and expertise.
Single Stock Risk - Paradoxically, a handful of companies have grown so large in size that they comprise a non-insignificant amount of the S&P index. When you buy this collection of 500 stocks, in reality almost 1 in 4 dollars is going to be invested in Amazon, Apple, Facebook, Microsoft, and Google. Not as diversified as you thought, huh?
Investing Style 2: Buy Bonds, either on their own or in conjunction with equities (stocks). Bonds have been around since the dawn of time, and simply, they are an agreement between one party and another to borrow money at a specified interest rate over a defined length of time. Upon the completion of the term, the principal of the loan is repaid along with the final interest payment from the borrower to the lender. Historically, Treasury, Corporate and Municipal bonds have provided a strong counterbalance to equity portfolio’s more volatile performance, yielding a solid, if unremarkable, return. Buying bonds that are mispriced (the borrower is good for the money but the bonds are trading below their ‘par’ or ‘principal’ value, has proven to be a winning investment strategy.
Pros:
Low Volatility - Investment grade bonds are a stable investment that is EXTREMELY unlikely to lose any value.
Consistency - no matter what happens in the world, the interest payments keep coming.
Low maintenance - Buy and forget
Income from Municipal bonds is typically tax free.
Cons:
The total return profile on all types of bonds right now is VERY low. 30 Year Treasury bonds are paying a measly 1.57% annual yield (as of writing), and Investment Grade Corporate debt doesn’t pay much more than that, paying up to maybe(?) 4% annually.
Inflation Risk - Buying a bond involves forking over your cash now in return for interest payments and the return of your cash years from now. In that time, inflation occurs, so your principal has less purchasing power when you get it back. If inflation is high enough, this effect may completely erode and even overpower the interest payments you are receiving, so that you’re actually just locked in to lose money over time.
Interest Risk - The Federal Reserve has set the target federal funds rate to 0%. This means that all bonds you buy now will be priced with that interest rate in mind. If the Federal Reserve decides to raise interest rates tomorrow, you will likely be able to get a much higher yield from bonds. In layman speak, from an interest rate perspective, you would be buying bonds at the worst possible historical price.
Opportunity cost - almost any other asset would earn you a higher return.
I would highly caution you against purchasing bonds as they pay you next to nothing for the interest rate and inflation risks you are taking on. Even municipal bonds that pay out income tax free have an incredibly high opportunity cost. What pays more - a stock that pays a 10% dividend with 15% long term capital gains tax, or a municipal bond paying 3% tax free?
Investing Style 3: Personal Portfolio Construction. This approach involves researching companies, allocating capital, and purchasing a diversified group of companies that you like and are prepared to hold for the medium - long term. Typically, a portfolio with more than 25 individual stocks is considered statistically ‘diversified’.
Pros:
Free. Your assets are yours and don’t charge a management fee. In fact, many of them pay you to own them.
Efficient - You could buy all 500 of the companies in the S&P 500, but who says 250 of them are any good? By choosing how to allocate your capital into companies that you think will be excellent investments, you reduce ‘dead capital’, or money invested into companies you don’t think present a compelling opportunity.
Precise Control - you are able to control your precise position sizing which allows you to control your risk with a high degree of confidence. You can deploy your capital appropriately into companies based on their individual risk / return profile.
Higher return - The studies discussing how active management is beaten in the long run by buying the S&P are talking about mutual fund managers who have very little flexibility when it comes to their investing process. Typical successful retail investors can easily earn returns >20% annually with a disciplined investment selection / timing process.
Interesting - (To me at least,) Being involved in individual company research and general market dynamics makes you much more aware of the world around you and will make you smarter + more engaged in your daily life.
Cons:
Responsibility - You and you alone are responsible for your investment performance. While this is always true, with any other strategy you have ‘plausible deniability’ when it comes to blaming something or someone else for poor performance. I remain convinced that people continue to retain the services of financial advisors for this precise reason - they want someone to blame when the shit hits the fan and they want to disassociate the responsibility involved in their personal finance decision making.
Time investment - Researching and learning about the markets, sectors, and companies takes some time, and staying up to date with your investments takes a continued (if brief daily or weekly) commitment. If one of your stocks warns about its ability to generate profits in the future, or other somesuch, you need to be aware of that information + be able to act on it in a timely manner.
Investing Style 4: Active Trading. This involves active participation in the financial markets, continuous analysis of the market’s opportunity set, and constant portfolio management. Active trading essentially looks to take advantage of short - medium term price dislocations, patterns, and opportunities within the financial markets, and take trades that look to capitalize on those situations. I would describe this as what I do for a living.
Pros:
Fun - I love what I do! I’m constantly learning, being challenged, and realizing my ideas in real time.
Rewarding - The return profile of a successful active trader is much, much higher than the typical performance of a basket of stocks.
Cons:
Volatile - While the constant adjustments that a typical trader makes should theoretically decrease volatility, increased awareness and precision allows a higher level of leverage, which presents similar or even increased portfolio volatility.
Time intensive - This is my full time job. Keeping up with the markets and all relevant news and opportunities takes a significant time commitment.
Hard - Learning how to actively trade can take a long time (5 years in and I’m just now starting to get it), which in turn can discourage new traders and active portfolio managers from continuing along the path to eventual success.
Personally, my active management style involves trying to accumulate as much stock as possible at as low a price as possible, so I can earn dividends, yields, and capital appreciation, and then distributing those shares as they increase in price. Most companies have some sort of fundamental ‘fair value’ based on their operations and the industry they are in, and I look to find stocks where the ‘fair value’ is very different from the stock price, so I can then take advantage of that difference, and get paid to hold the stock in the interim. I’d be happy to discuss much more in detail if you’d care to know about it as time goes on.
So there you have it… the most common methods of trading in personal brokerage accounts.
I just wanted to get you off and running on the right foot so you could make a solid decision about how you want to approach this challenge/opportunity.
I’ll leave you with a few companies I think are probably worth your further acquaintance:
T - AT&T
SLQT - SelectQuote
UNFI - United Natural Foods
STOR - STORE Capital
BP - British Petroleum
INTC - Intel Corp
NYCB - New York Community Bancorp
SHOP - Shopify Inc
AM - Antero Midstream
I’ve picked these companies because I think that learning more about them might serve as a solid basis for learning about companies in multiple different industries, as well as the fact that I think they would also make decent investments at this point in time. The bolded letter(s) before the company name is called a “Ticker”, and it’s how company stock is organized on the exchanges. Investopedia and Yahoo Finance are two great free resources for learning almost everything you need to know about company specifics and the financial markets in general. The book “Trade Like A Stock Market Wizard” by Mark Minervini is also incredibly valuable and worth a read.
Cheers!
''
🚨🚨🚨
Looking for the next big move?
Supercharge your profits with our high-quality trade ideas and investment research.
Try it for free: www.propnotes.co/
Looking for the next big move?
Supercharge your profits with our high-quality trade ideas and investment research.
Try it for free: www.propnotes.co/
