If you are new to this site you may want to start with part 1 of this series. If you are a returning reader, Welcome Back!
By now you should have created a plan to save money for investing and have several goals in mind. Today it’s time to consider what style of trading you will need to reach your goals.
Long Term Goals (10+ years)
For big long term goals like purchasing a home, you will need a long term investing strategy. Invest in value stocks or any investment that pays a dividend.
Strategies include:
⁃ Dividend paying stocks – usually Big Cap stocks
⁃ Value Investing
⁃ ETF’s
⁃ Mutual Funds
⁃ Index Funds
It’s best to reinvest any dividends paid. Remember, you want less risk with these goals.
Intermediate Goals (5-10 years)
These are goals such as luxury vacations (Paris, Kentucky* in spring?), luxury car**, or any big ticket “want”. The item tends to have the word luxury associated with it.
Strategies include:
⁃ Value stocks
⁃ Small-Cap
⁃ Growth Stocks
Look for companies that are growing their business or good companies whose stocks are undervalued. Your goal is to create a portfolio of stocks you can cash in for a nice profit in the next 5-10 years. You’ll take on more risk for greater reward.
Short Term Goals (1 day – 5 years)
Short term trading is the riskiest, but with the high risk comes a larger reward. Your goal in short term trading is to buy and sell in a short period. You may keep a stock a day or over a year depending on your strategy.
Strategies include:
⁃ Day Trading
⁃ Swing Trading
⁃ Value Stocks
⁃ Penny Stocks
⁃ and many more…
BIG WARNING: SOME OF THESE STRATEGIES WILL LOSE MONEY. Short term trading is VERY risky!
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* Yes, there is a Paris, Kentucky. Fun fact, the first winery in the United States was in Kentucky. Oddly, it’s not related to Paris, Ky.
** or pickup if that is your thing
If you already have the money, great job! If not, keep saving and don’t get discouraged.
Your next step is to decide on your investing goals. Having an investment goal is important. What good is investing if there isn’t a reward for doing good. After choosing a specific goal, I found that I was more interested and made better decisions based on my goals. Your goals will also determine your investment style. Short term goals for short term investing and long term goals for long term investing. Don’t worry, it’s OK to have several goals. Just don’t pick too many, unless you have the cash to cover all of them.
Here are a few examples:
Pay off car (that’s one of my goals)
Retirement
Buy luxury vehicle
Buy a home
College
Luxury items (big TV, gadgets or other nice wants)
Big vacation – Is there somewhere you would really like to visit? Like the Fried Chicken Festival in Corbin, KY (not making this up and I want to go!).
Quit job – It would be nice to be independently wealthy. This one is hard, but possible.
Warning:
I tried investing for money and it didn’t work out well for me. Just being rich is a nice goal, but harder to obtain without the details to get you there.
Action Time:
Name one or two goals with a reasonable deadline. Write them down or create a goal board with pictures of what you want to achieve. This will keep you on track and interested.
Now that you have your goals, you can decide on your strategy and style of investing.
Here is how I put this into practice:
I’m hoping to pay off my new van early. I’m shooting at short term investing. I add a little extra money every month to my initial investing and shoot for small quick profits every week (swing trading – more on that later). This also keeps me focused on what financial books and resources to use.
$50 a month seems a bit extreme and I’m going to make it even more so. You can do this even if you make minimum wage! It’s true dear investor, keep reading!
I took the dive in early 2008 and started investing. I will admit I almost drowned a few times and the Wall Street sharks took a huge bite out of me, but I kept swimming. If you don’t have a small fortune or a sickly rich relative that has you in their will (Not counting the emails about the unknown rich relative in some unknown country), you’ll need to start out small.
How much do you need? It comes down to what you can afford. Can you take 5% of your monthly income and not miss it?
Example:
Minimum wage is $7.25
If you work 40 hours, you make roughly $1,100 a month. Of course dear Uncle Sam gets a cut and there are always the living taxes (state, local, school, road, oxygen, and just being alive taxes). So for example purposes, let’s say you are lucky and make $900 a month (did I say lucky?).
5% of $900 is (drum roll please) $45. For this example, we are going to round up to $50.
Now that you have committed (or need to be) this money to investing, here is the hard part (at least for me). Don’t spend it. Put it in a saving account or hide it in a jar (I did).
Tip: How to save money without knowing you are saving? Start a free checking account or savings account. Create an automatic deposit from your checking account in to this new account on the day you get paid (most online banking can do this). Don’t touch the money and don’t track it. You are hiding this secret money from you and everyone else. It’ll be there when you really need it.
In 10 months you are ready to go. It seems to be a long time, but trust me it can go by fast. To help it along, stick any extra money you acquire in the account/jar. Every little bit helps. Don’t worry if you take the whole 10 months, there are still plenty of things left to do. Like:
* Educating yourself on the stock market (subscribe to my rss and check back often)
* Choosing your strategy (What a coincidence, that’s a future post!)
* Deciding how much time you need/want to spend (you guessed it, there is a post for that too!)
Subscribe to the RSS or check back! Comments are always welcome!
I have found that by creating an end goal keeps investing interesting and fun. Your goal could be a vacation, new big TV, pay off or buy a car, or some new expensive item. Having a purpose as to why you invest will help you stay focused. I have found without the end goal I start to lose interest in my portfolio. I would recommend leaving “filthy rich”* off the list, it’s too generic. Make your goal specific and give yourself a reasonable deadline. This tip works best for short term investing, for long term investing make your goal a specific number.
My goal is to pay off my family’s van with my short term stock portfolio.
* I have met a rich person and I have met a filthy person, but I have yet to meet a filthy rich person.
A big mistake I made starting out was the idea to not sell. Several books and talking heads on TV said “Don’t sell!” My question for them was always the same, “Why not? Isn’t that how I make a profit?” Fortunately, the TV never spoke back to me.
Yes Virginia, its ok to sell your stocks.
Sell for only two reasons:
1. Take a profit
2. Limit a loss
Unless you have invested in a stock that pays a dividend, the only way to make money from your portfolio is to sell. It took me almost a year to figure that one out (duh!). If the stock is at a point where you are happy with the profit, don’t worry about the “what if”. Buy it again later and make more money. There is no reason you can’t re-buy a stock.
What about the commission?
There is no such thing as a free lunch. You have to pay a commission to both buy and sell. I’ve always made the commission part of my bought price. If the stock was $15 and I bought 100 shares, it cost me:
$1,500 + $14 ($7 buy + $7 sell) = $1,514
Divide that back to the individual stock price ($1,514/100) and I paid $15.14 (that’s my break even number, more about that later) for the stock. Now if the stock goes to $16.15 and I sell, that’s 10% profit ($100). It’s ok to laugh at my small numbers, I’m just a part-part time trader.
What about taxes?
Depending on how long you keep your stock determines how much taxes you pay. When I started out I was worried about paying the taxes. I read in the vast investing books that I collect, you were supposed to keep the stock for a year + 1 day. Bull crap! Really! If I can take a profit ($100, $1,000, $10,000), I’m taking a profit! Dear Uncle Sam is going to always get a cut, why jeopardize MY profit worrying about his cut.
Limit your loss
The stock market can go down, down ,down! And sometimes it can go down, down, down really fast. Limit your loss. Don’t let the sinking ship drown your hard earned money. Just like taking a profit, you can always re-buy later. Keep in mind there is a catch to re-buying on a loss. The IRS will not allow you to offset your gains with your losses if you re-buy a stock in a certain period of time (confusing, yes, more on it later as I figure it out!).
