I owe a great deal of gratitude to my father, for not just showing me “dad” things like how to throw a football, but teaching me about the value of money. He gave me my first book about investing. It was a brochure-shaped paperback from The Wall Street Journal called, Guide to Understanding Personal Finance and a second book called, Guide to Understanding Money & Markets. I have still made plenty of financial mistakes in my life, and still continue to do so on occasion, but it probably would have been a lot worse without his guidance.
In college, while interning during the summers, I learned about DRIPs - Dividend ReInvestment Plans that you could open directly through Fortune 500 companies. My father was a big fan of DRIPs and how the recurring reinvestment into the same value stocks could growth your wealth substantially over time. There was even a newsletter you could subscribe to called the DRIP Investor - yes, a physical newsletter that came in the mail! By the time I graduated college, I thought I was an investing master and waltzed into a Charles Schwab office to open my first brokerage account. I no longer wanted to just do DRIPs. I wanted to trade all stocks and even try options. I don’t even remember how much I opened the account with, but it was the bare minimum I could scrape together. My “broker” commended me on taking such initiative at a young age. I don’t think I ever heard from him again, probably because my balance was so low, it was not worth trying to offer me any equities to buy. Today, I see lots of millenials interested in financial independence through stock trading and bitcoin. I think it’s great to see, and I firmly believe I can learn just as much from the old brokers as I can from the “new guys and gals” coming up. In fact, I was late to the Robinhood game and the idea of commission free trading. I was a long-term E-Trade customer when they first came out. While Schwab and E-Trade are still around, Robinhood has more customers than both of these firms. Why? Commission free trading of course! When I started out, you would speak to a broker to “place” your trade. When I moved to E-Trade I thought that was a game changer - being able to buy and sell on my computer without an intermediary. Commissions were around the $10 range and have come down to around $5 today. But even at that level, it can be a killer for young investors. Hence, why Robinhood and mobile apps are the future. Think of it this way. Everyone knows which stocks have a really good chance of going up in value. I can put money on Google tomorrow at around $1,193 per share and have a pretty good chance that in 2-3 years it will definitely be worth more. But most investors, young and old can’t afford even a single share of Google stock. A commission is nothing more than a fee for being able to acquire a share of stock from the company through a given brokerage. Many companies allow you to buy stock directly, but the process is not nearly as convenient as going through a broker where you can buy almost any stock instantaneously. So the brokerage is basically charging you a convenience fee to use their system for purchasing your piece of Google. Being charged $5 to buy one share of Google is only 0.4% of the price. That’s less than 1%. But in the real world, the average investor is buying stocks that are much lower. On Robinhood, the most popular bought stocks are most likely to be less than $50 per share. A traditional brokerage will charge the same commission regardless of the price of the stock. So a $5 commission on a single share of say AMD stock at $32 a share is 15%. Yes, you just paid $5 to buy one share of AMD stock. So even if that stock never moves, you are 15% in the hole because of your out of pocket cost. Oh, and when you sell, there is a commission for that too. So even if you decided to hold AMD for a while, the stock would have to go to $37 to make your $5 back. Having your portfolio growth 5-10% in a year is considered a decent year. With your purchase of one share of AMD, you’re needing a gain of 3x. A brokerage that offers commission free trading allows investors to try their hand at owning equities with little risk. You simply need enough money to buy the price of one share and you’re instantly a stockholder of that company. If the stock moves even a few percentage points, you’re profitable. The bigger advantage is when you add to your position over time. If you slowly build up a portfolio, you would be paying $5 many times over. In several years you could easily rack up hundred if not thousands of dollars in commission fees. That money could have gone to buying more stock. This makes the argument for apps like Robinhood, Stockpile, and M1 Finance really compelling. While there is always room for people to abuse the system, I think there is more benefits to these new platforms than downside. Consistently investing over-time and using dollar cost averaging is a perfect way to use platforms with zero commissions (i.e. they’re not designed for day trading). While you may not get a full selection of stocks, they offer access to all the big names that you should be looking at anyway. If you’re looking for obscure equities and/or foreign stocks all the time, then you need to be on a more advanced trading platform and pay more advanced trading fees. With the barrier to stock trading so low nowadays there is no reason not to try and build your wealth plan. You don’t have to be married to any one platform either. Most people I know have several brokerage accounts for different purposes - even a mix of traditional and ebrokers. Some of these platforms will even give you a free share when you sign up. Check our blog sidebar for details. Everyone is always looking for an edge when it comes to equities. Wall Street has its celebrities just like the film and music industries, and Warren Edward Buffett is probably at the top of the list when it comes to following people who may have the best insight into where the market is heading. If you're just getting into stock investing and don't know about Berkshire Hathaway, it's one conglomerate you will want to research. They own substantial stakes in other companies like American Express, Coca-Cola, Apple - so much that when they buy or sell millions of shares in these companies it impacts their stock price. Conversely, when these companies do really poorly, the value of the Berkshire Hathaway portfolio can swing by several billion dollars each day.
Yes!! That's several billion dollars. Warren just released his annual letter to shareholders a few hours ago which is always something those in the industry like to read. On this page you can find all the past letters to Berkshire Hathaway shareholders - click 2018 to read the one that just came out. It’s exciting to watch your portfolio grow and hit major milestones. Even if you start with a few hundred dollars, it’s a big deal when you hit $1,000, then $10,000, then $20,000, and so on... 'til your first million (smile). If you’re familiar with our investment philosophy you know why it’s important to have slow growth stocks and real estate in your investment plan. Without those investment vehicles you could see even larger swings in your portfolio on the order of 20% or more in one month. With the advent of ETFs and cryptocurrencies, one of my greatest fears is that the stock market is becoming more like Vegas with each passing day. People begin to get numb to large swings and expect it. You shouldn't get into this bad habit if you want to build generational wealth. As your portfolio grows you need to get more comfortable looking at daily swings, but if you ever get used to 30-40% swings on a regular basis then you’re probably an amazing day trader and don’t need to read this blog. The swings we’re talking about are on the order of 5-10% and I expect that this WILL become the norm in the next 5 to 10 years. If we just take a 5% swing in one day, it sounds like such a small number when you only have $1000 in the market - a 5% drop is only a $50 loss for the day. But when you have a $50,000 portfolio, then you’ve suddenly loss $2,500. A $2,500 loss is a big deal, especially when you’ve built your portfolio quickly. You have a tendency to want to not lose a single dime. But keep in mind this comes with the territory. A small percent of a really big number is a lot of money. If you’re living entirely off of stock investments and lose say 5% on a $1MM portfolio, that’s $50,000. That’s more than many people make in a year. That’s the equivalent of an experienced school teacher working a whole year and not getting paid. Say you plan on living off your million dollar portfolio, using the money from dividends and stock appreciation each year to never touch the million dollar base. If you expect a 6% return then you’re living off of $60K each year. That’s really good for someone who gets to retire early at say 35 or 40 years of age and do nothing. Now let’s say the stock market has a bad year and your portfolio is now worth only $900K going into the next year. Even at the same 6% interest rate you now only take in $54K at the end of that year. Even if you are now comfortable with larger swings in your portfolio, that’s still $6,000 less for expenses that year. That’s $500 a month less - the equivalent of a car note, cable television and cell phone expenses, or even a good percentage of your mortgage if you still have one. This is why people who practice the principles of FIRE look for every cost savings they can find and don’t buy new cars or carry $200 cell phone bills each month. So the lesson here, start getting comfortable with changes in your portfolio each week. Investments can’t constantly go up each day the way we get older each day. Just don’t get too comfortable, use slower investment vehicles to ride out the slower times. For extra financial safety, start adopting more frugal habits at an earlier age, it will make life easier and more enjoyable than trying to live like a king until your 60, then being stuck at home trying to pay off your bills each month in retirement with a fixed income. I recently started reading 1500days.com - If you're not familiar with this guy, he basically describes his story as this:
"My main goal* was to build an investment and cash portfolio of $1,120,000* in 1500 days**, starting from 1/1/2013 and ending in February of 2017. I made my goal in 2016, my 1500 Days are over, and I’ve left my job." Mr. 1500 still blogs regularly to teach people how he maintains his lifestyle now that he's retired. Recently he posted how he lost a lot of money (on paper) due to the recent downturn in Facebook stock. It's a great example of the importance of not only diversifying your stock portfolio, but even your streams of income. Our opinion is that you have money in stocks, and real estate (REITS and physical single family homes). If you're really lucky, maybe you have a side business or partnership as well, that brings in a third income stream. Having a few income streams allows you to have some more risky bets like catching the upside when things go well in the stock market, but also a pile of more stable money to minimize losses so you can still pay the electric bill even in the worse months. Read about Mr. 1500's Facebook loss here. |
StpChgWelcome to StepChange (StpChg). A blog about personal finance, small business, and investing. Looking for the real estate blog Knew Home? Archives
May 2020
Categories
All
|