Last week we talked about evaluating securities investments, today we are going to discuss a couple of good strategies, and a few bad ones for investing in securities.
Next week we will discuss some downsides to investing in the stock market.
Buy-and-hold Investing in Securities
This is one of the most common securities investment strategies, and I don’t see anything wrong with it!
You buy stocks in a specific company, that you have researched, and then hold it for a long time!
The key here is that you have researched the company, and you don’t plan to watch the price every day. You plan to hold it for years, and don’t worry about little volatilities over the short term!
Dollar-Cost Averaging
Dollar-cost averaging is my favorite way to invest in the stock market. This is a very simple strategy that takes the emotion out of your investments. This is also why I prefer investing in the TSP and index funds, over purchasing individual stocks.
The idea of dollar-cost averaging is simple; you buy the same dollar amount of stock every month, no matter what.
When the market is trending upward, you invest $100/month, and when the market is trending downwards, you still invest $100/month. This allows you to invest without making emotional decisions and averages out your return. When the market is down, your $100 purchases more shares, and when the market is high it buys fewer shares, but at a higher value. Either way, you just keep investing in the market for the long term.
This is how your TSP works. If you chose to contribute 10% of your paycheck to your TSP, then you will buy stock with 10% of your paycheck regardless of what the market is doing.
This is simple, emotionless, investing at its finest.
Other Strategies
There are a ton of ways you can invest in Securities. Many of them are great options, and some of them not-so-great. While I utilize real estate as my main investment vessel, I have utilized all of the above strategies, and I definitely love index funds, the TSP, and some dividend stocks.
Below are three strategies I personally stay clear of. I would advise you to be extremely cautious when people are talking about how much money they make using these strategies.
I won’t tell you these strategies can’t be lucrative, they can, but in my experience 95% of the people talking about these strategies make more money teaching them, than they do using them.
Until the day one of these investors shows me their portfolio, or tax return, to validate their personal return (not what one of their mentors earns), I won’t touch these strategies.
Day-trading Securities Investment
This strategy isn’t so bad for investing in Securities. Day-trading is a legitimate method for investing in the stock market where you buy and sell shares of stock throughout the day. You can definitely make money doing this, and sometimes it is very lucrative, but there are several reasons that I’m not a fan of this strategy.
The first thing I dislike about day-trading is that every penny you earn will always be subject to short term capital gains tax. Capital gains tax is what you pay the government whenever you take profit from an investment. Long-term capital gains tax is 0-20% and is for any investment you own for over a year. Short-term capital gains tax ranges from 10-37% and is for any investment you own for less than a year.
Short-term capital gains tax can very quickly eat away at your profits, and unfortunately every day-trader has to pay them.
Secondly, most brokerages charge fees when you trade, and even higher fees for day traders. Even Robinhood, a platform that doesn’t charge fees on every transaction, won’t allow frequent day-trading.
This fees-per-trade can add up very quickly, especially when you trade multiple times a day. Some online brokerages charge $5-10 per trade, and others are cheaper but have other restrictions. Robinhood, for example, limits you to three day-trades per week, unless you have $25,000 in their account.
Beating the market is still hard
The best actively managed funds in the world only outpace index funds by a few percentage points. Once you factor in taxes and fees, they probably don’t make much more money.
Day-trading takes a lot of talent, and luck, to succeed. One of the reasons I’m opposed to day-trading is the amount of time it takes. I much prefer to buy a stock, or house, and not touch it again for a while.
To be a successful day-trader you need to be at your computer the moment the market opens, and closes, and quite frequently in between. You can definitely make money this way, but it just isn’t a way I would want to invest.
Keep these things in mind when somebody says they make 1% a day (365% ROI annually). If they talk about gross returns and omit taxes/fees, the odds are that they’re trying to sell you coaching or training.
CryptoCurrency
I get it, cryptocurrency has been around for a few years, and gained a lot of steam when the cost of bitcoin skyrocketed…and then plummeted…and then skyrocketed, and then plummeted.
If I had a nickel for every time I heard somebody talk about how many bitcoins they mined in an old laptop, or had in a “crypto wallet” that they lost, I would have a lot of nickels. I’m not sure if A) all of these crypto investors are full of shit, or B) are showing just how risky an investment it really is if they misplaced, or broke, thousands of dollars’ worth of bitcoin.
The bottom line is this, crypto might be valuable, but it hasn’t been around long enough for me to trust that it will become a stable investment choice.
Also, this currency is not widely accepted, or understood. I don’t invest in things I don’t understand, and I prefer to spend my time researching tried and true investment strategies.
Foreign Exchange (FOREX)
Forex is the process of exchanging one currency into another currency for a variety of reasons.
For example, if you have $100 U.S. dollars, and you trade it for ¥120 Japanese Yen, and then the next day you’re able to trade that ¥120 for $110, you just made $10 by trading currency.
You can definitely make money through foreign exchange, but there are a few major issues I have with this trading strategy.
The first issue is that I have NEVER met a Forex trader in person who made a lot of money trading. I have, however, met Forex traders who made money selling “get rich quick FOREX courses”.
There are a lot of industries where you can make money coaching. I have never seen more scams, spam, and fake claims of success to sell courses in my life than I have with Forex. It sickens me.
The closest I’ve had to anybody proving they made money using this strategy is when they told me to look at their mentor who made 8-figures trading Forex…but couldn’t prove they made 8-figures trading, and not 8-figures talking about trading.
All of these Forex coaches seem to operate in borderline pyramid marketing schemes that over-promise and under-deliver.
As you’ve probably heard me say before, if somebody is telling you something that sounds too good to be true, ask them to see their personal portfolio/transaction history, or tax return, to validate their wealth.
Nassim Taleb, has a great quote in his book Skin in the Game “Don’t tell me what you think, tell me what you have in your portfolio.” To me this says it all, if they can’t back it up with their own investments, don’t buy into it.
Investing in Securities
There are a lot of other strategies for investing in Securities, but I chose these because they are the most common ones I encounter. Some of these securities investment strategies are great, and some are not-so-great. As with anything, investing in what you're knowledgeable, and comfortable, with!
Make sure you avoid stock market risk when investing in securities too!
