A Quick Guide to Investing
If you’ve been paying attention to the Market, you’ve no doubt noticed a lot of stocks have been dropping lately. There are a lot of quality stocks under 30 RSI (more on them later). Now most people panic during this time, but I see it as the best time to buy. Remember…
You want to buy when others are fearful and sell when others are greedy!
A lot of time stock price drops are mostly fear based. If a company’s financials and strategies are still just as sound as before the drop, nothing about the investment has changed — just public perception — and it’s still just as good of a position to get into as before, it’s just now selling at a discount!
Now I mostly talk about Swing Trades on here, but today I’m going to talk a little bit about Investing.
Investing vs Trading
You might be thinking, “Wait I thought trading was investing?”
Sure, technically if you’re making money trading, it’s a type of investment. But the two have different strategies and tax implications so let’s define them a little more specifically:
Trading is more about the short term gains. You might Day Trade, or Swing Trade or any other form of buying and selling — but in generally, this strategy is a much more active way to invest your money. Trading is much more like tending a garden, it requires you to constantly work it to see results.
Investing is a long term strategy. Hence the term “Buy and Hold” or B&H as I sometimes refer to it as in my posts. Investing is much more passive than trading. You can make it fully automatic, with scheduled transfers and purchases handling it for you. Investing is more like planting a tree and letting it do its thing over time and watching it grow on its own.
*NOTE: When automatically investing, don’t worry about getting in at the best prices, this will all even out in the end with some months being up and some being down — what’s important is that you’re accumulating a solid position over time.
With investment accounts, discipline and patience is key! The best way to achieve this is to not look at these accounts. In fact, you might even want to have them with a different brokerage than your trading account i.e. invest with Fidelity and trade with TD Ameritrade (or whichever brokers you prefer).
Trading gains are also taxed differently than investing gains:
The U.S. capital gains tax only applies to profits from the sale of assets held for more than a year, referred to as “long-term capital gains.” The rates are 0%, 15%, or 20%, depending on your tax bracket. Short-term capital gains tax applies to assets held for a year or less, and are taxed as ordinary income.
IRAs and 401(k)s
It’s never too soon to start thinking (or dreaming) about retirement. IRAs and 401(k)s are types of retirement investing accounts. Basically, IRAs you have to set up yourself and a 401(k) Plan is something offered by your employer. Both basically have your money locked up until you reach age 59½, when you can then withdraw the funds without penalties. Let’s take a look at each of them:
You’ve probably heard of a 401(k) Plan, but what exactly is it? A 401(k) — named after a section of the U.S. Internal Revenue Code — is basically a retirement account created by your employer where part of you paycheck is deducted and place into an investment account. Some employers offer to match part of all of the amount that the employee puts in. Yes, that’s right, your employer will give you FREE MONEY!! I cannot stress this enough but if your company offers a 401(k) you should contribute the maximum amount allowed (if you can afford it), especially if your company has a matching program. Be sure to meet with someone in that department because they might have a few options for different types of investments the money in that account go into. And since you are learning more than most people know about the Stock Market, you’ll have a better idea of which fund makes the most sense for you.
A Traditional IRA, or Individual retirement account works just like your brokerage account except once you put money in, you can’t take it out until you’re 65 years old (there are exceptions to that, but I’ll let you do more research). The important thing about a regular IRA is that this money goes in UNTAXED. That’s right, you don’t pay taxes on the money you put in their the year you earn it BUT… you will pay the taxes AFTER you retire and take the money out. (You didn’t really think you were getting out of paying taxes, did you??)
A Roth IRA (named after former Delaware senator William Roth) is a type of retirement account where you pay the taxes BEFORE you deposit the money. Then when you retire, you can withdraw that money TAX FREE! You might be thinking, “Why would I want to pay taxes now? That’s future me’s problem!” Well, the reason is that (hopefully) in the future you’ll be making more money and thus be in a higher tax bracket, so say you start your Roth IRA in high school or college, and you pay the taxes when you’re younger and broker, they’ll be at a lower rate than if you’d pay when you’re old and wealthy. Just something to consider.
A SEP IRA or Simplified Employee Pension is a type of IRA an employer or self-employed person can establish. They can include employer contributions and may have higher deposit limits than standard IRAs and 401(k)s..
Keep in mind that IRAs have yearly limit contributions. But also know you can trade stocks within your IRAs, but until you have a lot of experience, it’s best to just put money in and let it ride!
***OH AND THE MOST IMPORTANT THING ABOUT IRAs!!!! *****
Don’t forget to actually INVEST your money!!
I’ve heard horror stories about people who were contributing to their IRAs for years and had no idea they had to actually invest it in stocks!! And IRA is just like a brokerage account, if you just let the cash sit there it’s not making you any money!!
What are dividends? They’re basically free money!!
Dividends are a way for a company to share some of its earnings with its investors— after-all, you are a shareholder of the company, what better way to say thanks than to share the wealth! Dividends are also a way for company’s to coax investors to buy and hold their stock instead of trading it. Dividends are typically referred to by their annual price or percentage but at commonly paid out quarterly. Here’s an example for $MRK:
So for every share of $MRK that you own by the ex-dividend date, you’ll get $0.65 each quarter! It might not sound like a lot but trust me it adds up quickly, especially when you begin to accumulate a large number of shares over time and reinvest that dividend by dripping it back into the stock. This small amount of money compound over time. As Warren Buffet famously said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
So what is this ex-dividend date I speak of? That’s the deadline date by which you have to be holding shares of that stock for the dividend to pay out that quarter — typically the ex-dividend date is few weeks before the payment date. This ensure that people aren’t just buying the stock the day before a dividend payment and then selling it the day after. The declaration date is the date in which the board announces the upcoming dividend info.
Okay, cool, so what is this DRIP reinvesting you mentioned? Basically with dividends, you have two options of where they go — either into your account as cash or you can select to auto-reinvest them back into the stock. These small amounts “drip” back in and continue to compound over time. You can set Drip globally over all stocks in your account or select the On/Off setting for each position individually. I personally set them globally to automatic Drip.
Here’s how to Enable your DRIP settings:
One important thing to note is that NOT EVERY company elects to pay dividends. Some prefer to reinvest its earning back into the company. Ironically, Warren Buffet’s company Berkshire Hathaway ($BRK/A and $BRK/B) does not pay dividends.
ETFs and Mutual Funds
By now I should hope you know what ETFs (Exchange Traded Funds) and Mutual Funds are, but if not here’s a super quick definition — They’re basically funds which contain a bundle of stocks that you can buy shares of at a lower cost than buying each of the stocks individually. This allows for diversification without the need to buy a bunch of individual stocks. The main difference between an ETF and a Mutual Fund is that ETFs are generally passively managed and Mutual Funds are actively managed. This results in Mutual Funds having a higher expense ratio aka a percentage fee charged to you for the work they’re doing managing the fund.
Funds are often grouped by themes or sector — for example Green Energy Funds, 5G Tech Funds, Growth Funds, Dividend Funds, S&P Tracking Funds, Precious Metals Funds, E-Sports Funds, the list goes on and on… This is helpful if you have thoughts or research leading you to believe a certain area of investing might prove to be very profitable in the future.
One thing to note is that studies have shown that overall, passively managed funds often outperform the actively managed ones, so don’t feel the need to pay a high expense ratio because most likely you’re not getting the bang for your buck. Although you should always do your own research on the performance of each individual fund.
Buying the Bottoms/Dips
If you elect not to set your investing to be automatic, you might want to adopt a strategy of scooping up stocks when they’re at their low points because, in general, 70% of the time stock go up! Just look at most quality stocks on a yearly chart.
The absolute best time to buy is after crashes. Pick any stock and look where it was at the end of March 2020 or September 2008. Compare where they are now to where they were then — Look at all that money you would’ve made if you bought at those bottoms! Let me reiterate…
You want to buy when others are fearful!
If you keep adding to your quality stock positions on the bottoms/dips, you’ll have a nice looking investment account in no time!
Dogs of the Dow
The Dogs of the Dow is a very low maintenance investment strategy. I say low maintenance because you only need to tend to this garden once a year!
The basic idea behind is that on the first of the year, you invest equally in last year’s Top 10 stocks from the Dow Jones.— these are the Dogs of the Dow. And then you leave it alone until January first of the next year and then move your money into those.
Now it doesn’t have to be on Jan 1st, you can really do it at anytime and then change it a year later, but why not start the year off with a resolution that’s easy to keep?!
Now the Dogs of the Dow are divided into two group — Big Dogs and Small Dogs. The SMALL DOGS are the five lowest priced stocks of the Top 10.
Coffee Can Investing
One strategy that I recently heard about is called a “Coffee Can Portfolio” based on research done by Rob Kirby.
“The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.”
The basic idea is to setup a portfolio chock full of quality stocks and then to just “set it and forget it” for 10 years! No idea how well this works, as I just heard about it, but I figured I’d include it in here for those interested. (Just don’t forget to set those dividends to DRIP!)
OR Access the PDF directly HERE.
Bread and Butter
GP uses the term “Bread and Butter Trades” to describe quality stocks trading under their 200 SMA (especially if they have a dividend!). Here’s a current example:
These unicorns are great adds to your investing accounts. I’ve created a scan to find them (below). Again, you can check if the company has a dividend payment HERE.
If the above code looks like Greek to you, check out my previous post about custom scans.
Under 30 RSI
As I’ve mentioned about RSI before, quality stocks don’t sit under 30 RSI for long. These are usually great opportunities to scoop up some good investments “on sale.” You can use a custom scan to search for stocks under 30. Since I’m skipping this week’s normal Sunday post to write this article, here’s a list of just a few stocks that are currently under 30 RSI as of Friday’s close (5/14/21)…
I personally have 3 accounts right now (GP has like half a dozen!). It just makes it easier to manage my investing vs my trading. The accounts don’t cost anything to have more than one — yes the investing and trading accounts are the same type of brokerage account, I just nicknamed them different to keep track of which is which. As I mentioned before, it would probably be smart to put the investing accounts with one broker and the trading with another to avoid the temptation of selling anything in the investment accounts.
The way I view the different accounts is like this…
- TRADING Brokerage Account — Money I might need in 5 years or less.
- INVESTING Brokerage Account — Money I might need in 5 — 10+ years.
- Roth IRA —Money I’ll need when I’m 60 years old.
Hopefully this helps get you started in researching investing as part of you wealth accumulation strategy. This is only scratching the surface, so do your homework and find a strategy that fits your personality and works best for you.
Trade long and prosper!