Wednesday, October 3, 2012

Three keys to safe(er) investing

This is modified and updated from my earlier financial blog. There are many strategies, with ours there are three keys to help you be efficient with both your time and money. Investing by low cost, commission free index ETFs is the first key. Think about it. If you invest in a number of obscure individual equities, say: MRCY, JNJ, KELYA, JNPR, SNY, MELI, AFAM, they may all be great companies - in fact, at the time of this writing, they are. However, after you own them, you get busy and X, Y, Z happens, and suddenly, they are not as good of a deal. Now what? It has been 30 days since you visited your account and one of these lovely equities is now down by 50%. That could happen with ETFs as well, but because they are broadly based, they tend to fall a little less and a little slower than some equities though they may also rise less and slower. Since we do not have armies of analysts and computers that never sleep monitoring our investments this is a little safer. After all an Exchange Traded Fund ( ETF ) show not totally go to zero, with an individual equity, if the company goes bankrupt we are at the back of the creditor line. You can be an active investor even if you do not move beyond index and specialized ETFs. Take a minute to check out this incredible resource, If you go to their ETF page, they have a browser that allows you to compare and contrast hundreds of ETFs by type. For instance, I might want to achieve some diversification based on the size of companies. A common categorization is "small cap, mid cap, large cap and mega cap". Cap is short for market capitalization, the amount of money the outstanding shares of stock are worth. More or less, small cap is 300 Million to 2 Billion, mid, 2 - 10 billion, large above 10. Why do you care? Well if you look at the ETFs that I selected from, RZV - small cap value, CZA - mid cap value, CVY - large cap value, you can easily see that RZV is more volatile. It had lower lows and higher highs in a this three month period. TIP: the less you pay for your ETF, the more money you can invest. Two things to consider:
  • What is the trade fee to buy the ETF? This varies by online broker, but many online brokers will let you buy some ETFs with no trade fee, check out the deals at Charles Schwab and Ameritrade for starters.
  • What is the management fee? Charles Schwab brand ETFs have a low management fee and so does Vanguard. After that, it is up to you to research. The second key is to recycle your trading ideas. In another blog post we will talk more about that. Go to the store, buy one of those cheap composition books, or even better (since this is real money we are talking about), invest in a Moleskine Legendary notebook. Create a table of contents. Give every equity you want to follow at least four pages. Make observations and predictions. Establish a thesis: "I believe this equity will go up (down) because...", then list as many reasons as possible, and see what happens. As you mature as an investor and move from index based ETFs to also add individual equities to your portfolio, you will want to establish a position in eight to twelve companies that you understand. As you grow even more, you may have small positions in candidates that may one day become core holdings. The third key is to have an online portfolio, or even several. A great place to start is Google Finance, but if you prefer a different web site, more power to you. The idea though is to have one place where you can look at ETFs and individual equities you are interested in to see how they are doing at a glance. Although I set time aside during the year for deep study, week to week, I try not to spend more than fifteen minutes in the evening, Sunday through Thursday, looking at the market. I know what I am interested in. I have my portfolio showing on Google Finance, I bring up the online broker basket* that I have allocated some money to and I start making my decisions. Even though I am busy and need to go fast, I often make my decisions one night, sleep on them, come back the next night and if it still makes sense, execute the trade.
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