We wanted to take a minute to speak to the new investor who either is looking to enter the world of investing or simply needs basic navigation on where to start. Even though we focus on trading I have been around the block enough as a financial advisor in my former days where I can offer some critical insight on how to get started.
I will frame this conversation to what most like to call the three buckets to investing success. Regardless if you actively participate in company-sponsored plans, considering working with a financial advisor or simply looking to manage your own investments, this article will answer a lot of questions to those that are just starting out.
Bucket 1: Company sponsored plans and contributions.
When I used to manage assets one of the first things I would ask new investors was how involved were they in participating in their company plans. Most would respond back with either they match and contribute on a monthly basis what they could but still didn't understand too much how to invest those proceeds.
This can be confusing given a lot of plan investment meetings that employers held would leave more questions than answers when it was all said and done. However, here is how you can solve this dilemma right away without having to spend hours learning about asset allocation or mutual fund selection.
If you go to several robo-advisory RIAs they have free sophisticated algorithms that will ask you questions about your retirement goals, how much you hope to have, what your emotions are about money and other questions related to your retirement roadmap. They will take the answers you feed them in the questionnaire and tell you right on the spot how you should be allocated to reach those financial goals. Their method which most people follow with investing is based on the Modern Portfolio theory (will discuss at another time) in lining up three main things:
1. Time horizon until you need the money
2. Your current age compared to when you will need the money
3. Your views on risk in the stock market
Now I will save you time in saying the younger you are the riskier you can be with your investments. As you get older just like a dial, you shift your money away from risky assets and into conservative assets such as fixed income for example. The reason you can do this is if you're in your 30's and having an asset allocation of 70% diversified stock portfolio and say 30% fixed income portfolio, you can withstand market corrections and still be okay to reach your end goal if its retirement at age 65 plus. What if you're approaching retirement in say 5 years? Well, you typically want to insulate yourself from major market pullbacks in order to make sure you don't lose a significant amount in your portfolio leaving you to work longer than you really wanted to. This means a portfolio allocation of say 60% fixed income to 40% stocks should get you mid-single-digit returns annually while not losing nearly as much in a stock market pullback as someone who's 100% investing in all stocks.
So what does this have to do with company-sponsored plans? Well, with the information I gave you once you understand your "allocation number" from the above free resources, you can go call your 800 number on 401K or other company plan statement you get each month and tell the licensed advisor you want this allocation mix in your 401K and he or she will tell you which mutual funds in the plan do just that.
Also, be sure to max out your plan contributions as much as you can because there are wonderful companies out there that will match you every month whatever you contribute up to a certain dollar amount or percentage amount each year. That is a risk-free return right there without having to place one buy in a security.
(The robo companies I recommend to get the questionnaire done is either wealthfront.com or betterment.com)
Now that we have our corporate plan squared away let's move on to the next bucket.
Bucket 2: Considering Finding Professional Help
Usually, as individuals get older they make more money in the workplace. After one maxes out their 401K or other company sponsored plans they tend to take more money and open up IRA's or standard brokerage accounts to name a few. Now, these types of accounts are a wide arena to invest in virtually anything you want other than just be limited to a dozen mutual funds in sponsored plans. With this new influx of opportunity, there are a host of new things to learn.
So that is why most people will request the help of financial professionals who can educate and implement an investment plan for you. They can be active in buying and selling stocks for you or be passive by building a portfolio that has a little bit of everything to provide growth or provide capital preservation.
They usually do this in 3 main ways:
Buy ETF's investing in various global markets and concentrated sectors (i.e technology, industrial, healthcare etc)
They buy index low-cost mutual funds to match to an extent the broader markets return so you won't make or lose much-compared of the DOW or S&P500 for example if its a domestic allocation.
They will find alternative investments for you that are not correlated to stock markets gyrations and has a separate risk/return profile completely. This can be finding hedge fund managers to allocate your money to, buying what is called LIQUID ALTS or simply buying hard assets and commodities that typically outpace inflation and act as hedges if markets fall usually.
Now you notice I didn't mention regular mutual funds. With the barriers to access so easy now for everyday investors being able to invest in whatever, if there are financial advisors trying to sell you high-cost mutual funds that have high fees RUN!
Be aware though as a precaution when selecting a financial advisor you can go three routes.
Go low cost using a robo-advisory which is a computer managing your money by selecting the investments and rebalancing the portfolio based on your goal targets.
Hire a financial advisor who doesn't make commissions off of you but gets charged a flat annual fee for managing your assets. A good starting point is finding an advisor between 1% to say 1.75% annual fee tops on smaller investment. Anything higher and you're basically paying for office rent and marketing for that advisor.
As a side note, most financial advisors don't utilize alternative investments, use options strategies to hedge market downturns or simply don't go short in portfolios (betting the market and thus stock prices will fall to earn a return on the downside) when it comes to your money. So ask them bluntly how do you protect my portfolio if markets selloff. If they give you broad language of well we set up a diversified portfolio yadda yadda yadda then ask them to show you the allocations and how it will work in a down market.
So now you have your sponsored plans taken care of and maybe now you have professional help for more complex investments, let's get to bucket number 3.
Bucket 3: The DIY Account
This bucket is solely for two purposes and should be treated that way. One is to generate extra income from the financial markets on a monthly or quarterly basis, and the other is to be a bit speculative in finding much higher rates of returns trying to beat the market every year. The great thing about this bucket is it's you who will be doing the investing (trading) and your end goal is to make money in down, up and sideways markets at all times. While your company-sponsored plans are geared towards long-term growth, your financial advisor is looking out for your entire financial picture, this account is strictly for income generation.
What are the investments you should look to invest in this bucket? Well, there are options trading on stocks, futures trading and maybe specialty assets such as real estate if that is your interest.
I personally prefer to trade options on stocks because it can be broken down into several advantages:
* I don't have to spend $1,000's of dollars buying outright shares in the company hoping for a move
* I can have defined amounts I am willing to lose on each trade
* I can profit on a stock falling or going up depending on what my beliefs are on it
* And I don't have to wait months or longer to see returns. Sometimes they happen over a day or two.
Options trading is a powerful tool which a lot of people still don't fully understand because its made out to be complex or financial advisors usually will advise against these markets because they themselves have never traded them on a consistent basis.
So what are options? Well, if you want to really learn this third bucket I would encourage you to watch our FREE webinar this Friday where one of our students will walk you through the basics and talk how he trades them while still maintaining a 40-hr full-time job.
I just gave you advice that if you went to a financial advisor he would have charged you a few hundred bucks. So take this information and utilize these easy hacks to get started in taking control of your investment buckets.
Register for the options webinar here: How I made 20K In February Trading Part Time