A youngster with some money in his pocket, time on his side and designs on scoring big in the stock market took to Reddit this week in search of the kind of advice that would help him on his way.
“I have $ 10k sitting in my TDAmeritrade taxable account, ready to trade with, but I’ve been learning about investing for the last 1-2 months. I bought ‘The Intelligent Investor,’ and ‘A Random Walk Down Wall Street.’ I’m not done reading the books, yet, but how will you know when you’re ready to start investing? I’m anxious to get started, but how do I know if I’ll be ready?”
CarpeDiem437 explained that he doesn’t have any short-term, concrete goals and, since he’s got a long timeline, he’s “willing to take some risks for huge gains.”
Responses on the discussion board ranged from “buy what you know” to “load up on index funds.” One guy admitted that he’s been trading for years and still has no idea what he’s doing on most days.
While there were some good (and some not so good) tips amid the anonymous Reddit banter, we decided this question deserved some more attention. After all, every would-be trader has to decide when/if to take the plunge, and those first steps can be intimidating, scary and oftentimes costly.
So we canvassed six notable names from the financial blogosphere to see what wisdom they could impart to CarpeDiem437, and this is what they said:
Michael Batnick, director of research at Ritholtz Capital Management:
Start now! I would never recommend somebody do this with their retirement money, but taking risks for huge gains isn’t a terrible idea for a young person, especially given how favorable market conditions have been recently. But I will warn you of a few things: The likelihood of you doubling or tripling your money is slim at best. And if you do stumble upon beginners luck, the odds that you’re going to walk away with those gains is slim to none. Here’s why: There are a lot of really smart people who will be more than happy to take the other side of your trade. 90% of trading volume is done by institutions who spend millions of dollars a year on research. They have more information and resources than you can possibly imagine.
If you’re reading those two books, especially “A Random Walk,” you already know how difficult it is to beat the market. But this is one of those things that you have to find out for yourself. Nobody opens up a brokerage account, buys the total global stock market and forgets about it. So take risks. Double your money, lose it all. The only way to learn is by doing, so get going!
Eddy Elfenbein of the Crossing Wall Street blog:
When it comes to “how do I know if I’ll be ready,” I always tell investors to try paper investing first. It sounds corny, but it works. Draw up a fictional account, but one that you think you’d like. Compute the number of shares, expected dividends, etc. There are countless resources where you can follow this on the web. Then, sit back and follow it.
You’ll soon learn things about yourself. Do you constantly check it every five minutes. Are you freaking out if it drops a little bit? Trust me, you may realize you’re not the kind of investor you thought you were.
And if you want to really test yourself, see how your portfolio acted in 2007-08. Could you watch yourself take a 50% bath? It ain’t so easy. If you can do that, then you’re ready.
Wolf Richter of the Wolf Street blog:
If you’re young and able to digest a loss, and if you want to learn a lot – perhaps more than you bargained for – follow individual companies, do your research, study financial statements, and buy stocks in companies you believe in. Make sure to divvy up your money to buy at least 10 different stocks. This is a lot of fun. And a real eye-opener. You can get clobbered. But hey, that’s life. You already know that and are ready for it. And if you’re lucky, you might hit some big winners – the “huge gains” you’re going after.
Either way, you’ll end up with a better understanding of how the markets work and what the concept of “risk” means. And that’s more important than anything else at this stage in your investment career.
Howard Lindzon, co-founder of StockTwits:
1. Set up a watchlist and listen in on smart people and noise… learn the language — StockTwits is great for that.
2. Set up a brokerage account and just try it. Now with Robinhood you can do that fast and with a tiny commitment. Buy 1 share of your fave company.
3. Get a mentor.
And yes he’s right…why not shoot for the moon at a young age with a few great ideas that he likely has from products he already uses everyday. He may lose some money but he will learn and adjust as he goes.
Sven Henrich of the Northman Trader blog:
I would suggest that the statement “I’m willing to take some risks for huge gains” is a recipe for losing his $ 10K unless he’s got some solid experience, which he admittedly doesn’t. “Huge gains” is generally an unrealistic expectation for someone with little experience and a small account. This expectation invariably leads to overexposure & then ultimately losses.
However, there are aggressive traders out there that can achieve outsized returns, but it takes process, discipline and experience.
To develop in that area, without risking capital at first, one may want to practice with a virtual account, although, and this needs to be said too: Trading a virtual account versus actual capital at risk can be a very different experience.
Greg Harmon of Dragonfly Capital:
I would suggest that this guy start with simple technical analysis, and its most basic form: trend identification. Getting started can then be a quick 30 minutes of reading from any of many sources, including the first 2 chapters of my book. That will give him/her enough to be comfortable with identifying a long-term trend and where to protect capital for a trend change. This can give confidence on when to buy a broad market index ETF and establish a stop loss. This will also allow him/her more time to learn and slowly understand how to manage risk. There is no reason to take risk until you know how to manage it and have a plan in place.
For a young investor, getting started is the biggest step, as time invested plays a huge role in any passive return on investment. Finally, it is swinging for huge gains that most often causes investors to lose everything. Slow plodding growth through a process is how to get huge gains… over the long haul.