This blog is meant to be a sort of guide to anyone starting out investing. The stock market is a minefield, and I’d like to help out someone, anyone thinking of doing this. Its easy to lose money, and its easy to make catastrophic mistakes that lock losses for long periods of time. I try to weave this lessons with personal anecdotes and stories. Hopefully it doesn’t seem too self absorbing. If it does, well write something in the contact forms below. I’ll make whatever changes are necessary.
And now, for the lessons:
Concentration Is Not Your Friend
At the start, I put almost 90% of my money into technology companies. Being raised during the early through late stages of the internet, some of the companies I’m most familiar with are tech companies. But one thing you’ll realize is that tech companies, due to their high correlation with each other, pull each other up and down. If Facebook comes out with some bad news, its going to pull Tik Tok, Twitter, and Snapchat down, as they are all social media companies. Its going to pull Google and Amazon down, as they all get majority of their revenue from advertising. You get the point. It might be awesome when the news is all rosy. Its when shit gets bad when you’ll thank yourself for putting some cash into a boring old industrial company that holds up no matter what.
Since then, I’ve put a large portion of my portfolio - about 40% - into index funds. This includes total stock market funds and other ETFs. This ensures that a portion of my portfolio is relatively diversified, and therefore safe. I’ve also diversified my individual stock portfolio to cover up for my mistake, putting money into industrial companies, food manufacturers and real estate investment trusts. I’m still highly concentrated in tech - by my standards - but its at a point I’m comfortable with. If you’re not willing to put in the work, buy a broad market index fund. It’ll save you a lot of headaches.
Slow and Steady.
I made the mistake of dumping a huge amounts of cash into the market. This is compounded by the fact that I entered the market as it was beginning to go down. This meant that a large number of the stocks went down, and took that initial amount down with them. As an example, a 10% downward move on an initial $1,000 is still larger than a 90% upward move on $100. This is especially true when you are in a bear market, where its just a stream of negative news. This has actually been one of my biggest headaches, as it has taken much longer than I would have wanted to reach breakeven, even with subsequent investments.
So what’s the advice here? Dollar Cost Average. You’ll hear this quite a lot from me. But its with reason. This is probably the best strategy for a number of reasons. One, its a lot easier to plan for. You just select a specific amount which you are comfortable investing every month - heck, every week - and invest that. Second is that this is consistently the strategy that yields the best results, as it allows you to build substantial positions during downturns, and enjoy the ride during upturns. Three, and most importantly, it ensures that you don’t make costly mistakes with large amounts of cash at any point in time. Remember the first rule of the stock market: Don’t lose money - in this case too much money.
hey make money off of you
One of the silliest mistakes when I started out was not considering the costs involved in investing. Let me make this clear. Banks are not your friends. They make money off of you. The conversion rates they offer here border on the insane. The spreads they enjoy, fucking hell! When I made my first investment, I used the bank to transfer the money, and ended up paying more than 5% if the investment in the conversion and transfer costs. That is just insane, as that means that I have to make 5% on my initial investment to just cover up for this cost. One of the first platforms I used charged 2.3% upfront to just take my money. You quickly see how you can already be in the negative when you make your first investment.
If you can find a safe alternative to your bank and your card partner. Use it. Key word here being safe. Don’t be stupid about it. I currently use use Wise (formerly TransferWise) to dollar cost average into the markets. There’s still some cost to it, but its significantly lower than what the banks offer. And besides, I’m in this for the long haul, so the costs aren’t too big in the grand scheme of things. Also read the fine print for whatever broker you end up using. You don’t want your profits to be eaten up by transaction costs every time you buy. Interactive Brokers charges some of the lowest rates in the market. This is beneficial to me since I buy fractional shares.
Do Your Own Research
There are some companies I bought whose valuations sometimes make me sick. Knowing what I know now, I would have kept far away from those stock, no matter how promising they are. One of the basic measures of valuations ifs the PE Ratio. This is simply a measure of how many years it would take the company to pay you back your investment into it. So you can imagine what a PE Ratio of 100 means. I’ve discovered that I really don’t like risk, and are more inclined to value investing - not that this doesn’t have its own risk. That means PE Ratios past a certain threshold are just too expensive for me. I haven’t yet sold these stocks. I have an average hold period of 3 years. But whenever I’m assessing my portfolio, they do make me a little bit nervous.
My suggestion on this is to determine what kind of risk you are comfortable taking. That means looking at your own habits and predispositions. You can invest in broad market index funds at first, as you learn more about yourself and what you are into. This ensure you have a safe basket that can swallow up any mistakes you make. Try and keep away from the hype, as it might lead you to make some rash decisions. Remember, the stock market is fundamentally a game of psychology. So master your own psychology first, then get good at everyone else’s.
I’ve included links to some of the terms that you need to read up more on. Please make sure you do. One thing you’ll discover about active investing - trading individual stocks - is that it requires a whole lot of reading and observation. So if you are not up to it, stick to index funds. Otherwise, best of luck. Take care!