Part 1: Stocks

TL;DR: With what you can afford to lose, choose some of your favorite stocks.

Stocks: What’s synonymous to investments to most people these days. This is meant just as a starter guide.

Getting Started:

Stocks aren’t for everyone. They give your account more exposure to risk. However, you also get exposure to the American/world economy, so that when the world moves forward (economically), so do you (financially).

To start investing in stocks, you need to open a brokerage account and transfer in money. I recommend Robinhood (for commission-free trading), or Schwab (they have good service and many other investments to choose from as well. You may also qualify for 500 free trades!)

Where to find your edge:

The market generally trends up overall, and has good reason to do so. The best and brightest at all your favorite companies are (for the most part) working hard to create value, translating to rising stock prices. The government and fed also generally create policies that favor the economy (i.e company stock prices). This all explains why you see, on average, stock prices generally going up over time.

While you could invest in something like IVV (an ETF reflecting the value of the top 500 biggest companies in the US) to capture this effect, if you’re willing to take on more risk, you could invest in any individual stock as well. You could pick your favorite companies, and on average you will get the same returns as the market overall*, with the additional satisfaction that you believe in the company you chose. You also will avoid the expense ratios (explained under things to avoid),  which are fees that come with ETFs.

Other than this effect however, it’d be hard to say whether there’s value in stocks without doing significantly more research, and since this is a blog about passive investing, there’s not much more to do here.

Being Prudent:

Make sure you be realistic with yourself as to how much you can afford to lose, and how much you could realistically lose. Don’t put money you can’t afford losing at risk. On the other hand, however, unless you’re investing in very volatile companies, note that it’s hard to lose all your money at once too.

Just make sure you run through some disaster scenarios in your head. If something like or worse than 2008 happened, and you lost 50-60% of all your stock value, would you be okay with that? If so, you’re probably fine.

Things to avoid:

If you’re not careful, you could easily end up paying many unnecessary fees that really eat at your profits. Here are some to watch out for:

1. Commissions. These are really annoying and can range from $5-$20 a trade. If you make dozens (or hundreds) of trades a year, this really adds up. However, these are easily avoided if you choose the right brokerages (like the ones I recommended).
2. The bid-ask spread. Contrary to what the average joe thinks, at any point in time, the price at which you can buy a stock is always higher than the price you can sell it! For very liquid stocks (think AAPL, or SPY), this difference could be very minimal (maybe $0.01 a share), and in the case of long-term investors, maybe this isn’t much of a problem. However, for less traded stocks, this could be very far! Be mindful of this when trading. You can avoid this by using limit orders (where you specify a price you’d like to trade at) and being patient, or just being vigilant and trading when the bid-ask spread tightens (brokerages will usually give you these numbers. Otherwise you can find them on Yahoo or Google finance, though those numbers can be delayed).
3. ETF expense ratios. When you buy ETFs, it can be convenient to diversify risk without having to manage things on your own. However, they all come with an expense ratio, i.e. a cost you pay so that someone can keep these ETFs in check and in line. These fees can range from almost nothing to over 1%.
4. Interest. If you decide to sell short some companies (overall not recommended unless you’ve done your research), or borrow money to buy stocks with more money than you own, be mindful of the fees you’ll be paying for that. Usually it’s not worth it unless you have very high convictions about your investments.
5. Hype blogs. Sometimes there will be hype around certain stocks that you’ll find online or elsewhere. Be careful of this. While I can’t say there’s no secret sauce in stock-picking, following the hype is usually a losing strategy.

Happy investing,

TheJKW

*On average! Investing in individual companies can be significantly more risky and actual results may vary wildly. I would recommend holding a basket of different stocks