24-Hour Trading is a Bad Idea

I'm on record regarding my misgivings about the Robinhood app, which in addition to 'gamifying' investing, has for some time has offered investors extended-hours trading. Now Charles Schwab has made the same decision, allowing its clients the ability to trade securities pretty much any time. 

Sounds like a great idea, right? Why be limited by the hours the exchanges are open? Buy and sell whenever you want! 

But the problem is two-fold. First, off-hours trades have pricing issues because most trading volume takes place during exchange hours, and highly active real-time supply/demand ensures accurate to-the-second pricing data. At moments when not enough shares are changing hands, an investor cannot have confidence that the price they pay at 9pm or 2am is in fact a fair price. 

Secondly, no one makes their best decisions during the night. You're tired from a full day. Maybe you had a big dinner, or an edible or a couple of drinks. Your circadian rhythm slows your thinking, and slows your metabolism. Executive brain function, critical thinking, logic, mental math, are all operating on a skeleton crew. Which makes it not really a great moment to place a bet with hundreds or thousands of your hard-won dollars. 

If you primarily use one of these securities trading platforms, and you're the sort who scrolls stock news or 'fintech' while half-watching Netflix after work, I would sincerely urge you to set yourself limits. You get an idea? Sleep on it. You see a story or a post which scares you? Sleep on it. Markets move fast but not that fast. The losses you save by not making a compromised decision in the late evening will speak for themselves. Remember what Charlie Munger said: "It's not brilliance. It's just avoiding stupidity."  

Morningstar's Samantha Lamas's column, below. Happy Valentine's Day all!

Why Schwab’s 24-Hour Trading Might Be a Bad Idea for Investors

Robin

The Art of Not Panicking - Ben Carlson

The world is full of unknowns and uncertainties. Right now is a delicate time in global finance, as the President of the United States, one of the largest consumer and financial markets on earth, is rolling the dice. The new administration is conducting a massive high-stakes economic experiment in which investors are among the lab rats: What happens when a huge market employs tariffs not only on particular goods or on imports from particular trading partners but on nearly everyone? What happens, further, when those tariffs materialize overnight and evaporate just as fast— when they are in fact merely threats? How can businesses who buy materials overseas or consumers who purchase goods overseas predict costs, or plan spending?

Now add in the effect of those tariff countries placing their own tit-for-tat tariffs on American goods and materials? Will buying continue at higher prices for all? Will it drop off a cliff? How can businesses and consumers manage the uncertainty?

And underlying all of this for investors: What will happen to the revenue of the businesses we own? To profits? How can we plan for that? What do we do with our portfolios in the meantime?  

My investing colleague Ben Carlson just dropped a column every investor should read: 

A Wealth of Common Sense - Don’t Panic

What 'Billionaire's Row' Means for Investors

From the very beginning of this column, I have advocated to be always buying in the markets. At times of distress and losses, at times of celebration and gains. Maybe it’s a few percentage points of your paycheck that automatically goes into an S&P500 index ETF via your retirement account, or maybe you regularly set aside a little each pay period and try to figure out where to invest it. But it’s regular and it is in spite of the news, or the interest rate cycle, or the political moment or wars abroad or your feelings of uncertainty. Always. 

And now, in this moment, I am a bit flummoxed. I don’t really know where to place the funds. 

Since my last post, we’ve got not only a new (old) president. We have a new GOP-led Congress, and those two branches of government join a right-leaning revisionist Supreme Court. Taken together, at a glance this would appear to be the most uniformly conservative American government in many years. But it’s not actually conservative by any traditional measure. It’s certainly nationalist, isolationist, and pedal-to-the-metal kleptocratic (not one but two Trump cryptocurrencies? Naked cash grab!) 

Already cracks are showing: a couple of President Trump’s cabinet picks may in fact not get the nod from the Senate. Elon Musk, co-lead of the new Department of Government Efficiency, appears to have summarily axed his supposed partner, Vivek Ramaswamy. And many of the newly signed Executive Orders look like nothing more than empty promises, just red meat for his base, and are very unlikely to survive scrutiny or lawsuits. Trump sees the presidency not as a job but as a performance for which he expects to be well paid. But when the dust settles, even Trump can’t simply rewrite the 14^th Amendment to the Constitution to outlaw birthright citizenship. Even Trump can’t unilaterally rename the Gulf of Mexico, annex Greenland, or through sheer force of personality decide how many genders exist. He bullies and postures, it fires up his base, he sells them his dumb $TRUMPcoin, he gets richer, and all of it inflates his ego and generates fear in those who oppose him. Classic autocrat playbook. 

That said, much of what I discussed in my last post remains true, and is worrisome. Inflation remains a major concern, and many of the president’s promised policy shifts would ultimately drive up prices. The same for mass deportations: if he fulfills his promises, and it looks like he’ll at least try, not only will hundreds of thousands of families be split and people forced from their homes and loved ones— who will do all those jobs? What does that mean for productivity and access to goods? Finally, tariffs are a huge question mark hanging over the economy the next few years. To date, it would seem the president is more interesting in using the threat of tariffs to get what he wants from other nations. But make no mistake, his bluff will be called. Then supply will fall against demand, and prices will rise.

So what does all this mean to the investor? Often a safe play is to just follow the money. 

Billionaires bending the knee

At his inauguration ceremony, Trump’s favorite billionaires were literally trotted out on display for the masses: Tesla’s and SpaceX’s Musk, Amazon’s Jeff Bezos, Meta’s (Facebook’s) Mark Zuckerberg, Google’s Sundar Pichai, Apple’s Tim Cook (only Microsoft’s Satya Nadella and Nvidia’s Jensen Huang were absent). Plus podcaster Joe Rogan, LVMH founder Bernard Arnault, UFC CEO Dana White. Each gave $1million or more to Trump’s inauguration fund— Musk put over $200 million into the election itself— which is to say they bought their way in. They were on the dais, lined up, Trump's acolytes, behind his family but in front of his cabinet picks. I am assuming that proximity to the president here equates to Oval Office access, and that’s surely intentional. We've long known that Trump is susceptible to both flattery and financial quid pro quo. So as a betting man, I’d say those particular companies have a strong chance of getting exempted from any coming tariffs; their expansion and acquisition plans will probably get a green light from the Justice Department.

What else looks good for your investment dollars right now? Based solely on what we know of Trump and his interests, I’d be looking broadly at the big banks, like JP Morgan Chase, Bank of America and Goldman Sachs. Do I need to mention Trump likes money? That he sees himself as a big shot financier and wants to hang with that crowd? Also ‘Big Oil’ such as Exxon and Chevron. Defense contractors both hardware (warplanes, tanks, missiles, ammunition, spy satellites) and software (intelligence gathering and processing, guidance systems, computer and network security). 

It gets extra sticky when we start to consider how close to all-time highs much of the stock market is right now. The question everyone is asking: If companies are already so richly valued, how much upside remains? For that matter, the market is highly concentrated: currently the 10 largest US companies comprise about 37% of the entirety of the S&P 500 index. So if you’re an index investor because you like getting the automatic diversity, think for a moment— a huge portion of your seemingly low-risk investment hinges in large part on the success of just 10 businesses (5 of which were represented at the inauguration). My default play, just buying shares of the S&P 500 index and then ignoring them for a decade, is looking a little less certain. But again: I am spit-balling here. No one really knows what’s coming next.

The new administration is nothing if not transactional. This crowd loves to make deals, and they expect something in return. They’ve exhibited a strong desire for substantial deregulation, which inherently favors big companies over small as the big ones have deep pockets necessary for buyouts and global expansion. So look for big mergers, which spell increased consolidation and further concentration of markets. Forget the old big-business bent of Doing The Right Thing, or Saving the Planet, or DEI Hiring, or Narrowing the Wealth Gap. For now that’s over. As of this week we’re re-entering the era of Might Makes Right. Adjust your portfolio accordingly.

 ————————————————————

Below are some great pieces I’ve seen recently which address these issues and more. A few are behind paywalls; apologies in advance.  

• Trump’s Economics Are Anybody’s Guess. Here’s Mine.

• The US stock market has never been more concentrated. Does it matter?

• FUCK! I DID NAZI THAT COMING!

• 22 states sue to stop Trump’s order blocking birthright citizenship

• Packed In for Trump’s Indoor Inauguration, Awkwardness Abounds

 

Well That Was a Surprise

First let me apologize to the two readers who genuinely look forward to my columns. It’s been a very long time since my last post, and I am sorry. 

I want to tell you what I got wrong.

 

I didn’t write explicitly about my expectations regarding US election outcome, but I was incorrect in my assumptions and that likely colored the comments I did make. I thought the Harris-Walz campaign would eke out a tight win, finally beginning to close the door on the Trump Republicans and kleptocratic plutocracy in the US. Clearly that did not happen. Good grief did I misread the national mood. 

 

I was also wrong to think the markets would be basically calm following the election. It’s normal to see a flurry of trading in and out of various sectors in anticipation of a new administration’s economic goals and business priorities, but it usually relaxes and leaves relatively little changed. 

 

But in this case the new Trump administration has such radical economic plans that investors are moving huge volumes of money into the industries and asset classes that look to benefit most from presidential actions— with help from an allied Congress and an indifferent Supreme Court. From Big Tech to cryptocurrencies to retail to AI to corporate mergers, investors are betting on big changes. So markets have been climbing since November 5: in only 24 trading days, the S&P 500 index is up 5%, and the Nasdaq has risen over 8% and both are clocking repeated record highs.

 

Sure, I could jump in with both feet to find some interesting plays for you— what to sell, what to buy, how to leverage this moment. But today I want to caution you. 

 

Because I do not believe this will last. (I could be wrong on this as well, so take it with salt.) I do not believe we are going to see substantial increased profitability, giant long term gains for shareholders or any kind of American business renaissance. I do not believe what’s happening right now will continue because it is not based on reduced costs or new products or market-changing ideas or business expansion or the slaying of foreign competition. Some companies are indeed doing great, but what we’re seeing in the markets— which by definition are forward looking— is merely an expectation of what is to come from the Trump White House. Yes, there will be deregulation and miles of open road for some of the most powerful industries in our economy, and that will reap shareholder benefits. Yes, businesses with ties to the administration will probably realize outsize gains. (Elon Musk’s Tesla and SpaceX? Of course! Amazon thanks to Chief-Suck-Up, Jeff Bezos. Zuckerberg’s Meta has donated to the Inauguration Committee. Tim Cook’s Apple always gets a pass. New crypto-friendly regulators will push Bitcoin …). Investors are literally banking on those changes. 

 

But what are not yet being factored into market prices are the counter impacts we should expect from other promised Trump administration policies:

• Deportation of ‘illegals’ by the millions, which will leave industries dependent on migrant populations without a workforce: think agriculture and meat processing, heartland manufacturers, all kinds of construction, the entire restaurant/hotel sector. Prices for those goods and services will skyrocket with fewer workers to provide them, and the job market could implode from the stress. 
• Deregulation of big business will benefit shareholders at the cost of consumers and small businesses. As large companies consolidate power and resources, effective monopolies will raise prices, widening the wealth gap and forcing more average folks to hold a second or even a third job just to get by. Meanwhile American families will continue to be weighed down by the rising cost of housing simultaneous with a deeply dysfunctional health care system which perennially underperforms even as it overcharges. 
• Tariffs on imports from around the globe, which will raise prices for consumers and stress US businesses struggling to fill the resulting demand gap. Making it worse, tariffs bring trade wars, with other nations slapping their own tariffs on American made products and commodities, further gumming up global supply chains and reducing affordability and access to goods. 
• Tax reductions on businesses and the wealthy will mean not only shrinking federal government coffers and necessary cuts to social programs (hard on seniors and the lower and middle classes), but also more spending power to affluent consumers. That will drive spending in an era of already-higher prices and reduced availability, which could in turn start us down an all new inflationary path. Prices finally coming down after 2021-2023 would go right back up. 

Taken together, these effects will be an albatross around the neck of American business and on our economy. These things will take time to play out, so it won’t happen overnight. But in a year or two, we could be right back where we were. Plenty of manual labor jobs but far fewer workers to fill them in our fields and restaurants, and both fewer options and higher prices on much of what we need to live— food, medical care, transportation, housing.

 

All of which is to say, enjoy the market bump while you have it. Plan ahead for a rainy day. If I’m right this time, it will be a downpour. Please note, I do not advocate selling and waiting for a safer time! (Never ever ever ..)

 

In poker, a smart player who’s up will continue to play but might take a little cash off the table. The stock market— really another form of gambling— is no different. When I see unexpected price jumps, especially those that are hard to explain or defend, I try to trim a few positions and pocket those gains. If you’ve been investing a while, you’re probably doing well too. So take a couple percentage points off your most-successful holdings and convert to cash. Then stash it in an interest-bearing savings account where you can access it for unexpected expenses (medical need, job loss, automotive breakdown, emergency travel …). A year from now I expect you’ll be glad for your prudence.

 

Making Sense of the News

As a stock investor, you are a stakeholder of a business, a minority owner. Which means that while you’re likely not making day-to-day operational business decisions, you must keep up with the goings on of every company you own. If one of them launches an important new product, or is fending off a tough competitor, or is named in a federal lawsuit, you want to know that. While it’s unlikely that on any given day there could be news which affects your decision to buy/sell/hold, you nonetheless must stay abreast of relevant information. The days of “No one ever got fired for buying IBM” are over. “Set it and forget it” only works on indexes.

In fact, the vast majority of the time I spend on my stock portfolio is reading the news. Business news, financial news, economics, politics, even a little style and entertainment. Most money managers and professional investors depend heavily on a combination of quarterly and annual reports, press releases, earnings calls and executive speeches and interviews— all of it issued by the company in question and all of it subject to its self-interested spin. Systematic, by-the-numbers investors will distill all this information, along with some competitive and market analysis, into an expected valuation. And that informs their expectation of price increases or decreases ahead and drives their investing behavior.

But I generally don’t spend much energy on what the business tells me or wants me to think (beyond its statements regarding strategy, focus, executive rotation, and its own projections of profits). I believe real-world valuations must be more nuanced, must incorporate sentiments already noticeable that might have nothing to do with a dense spreadsheet. I believe Mr Market invests in one stock over another partly for expectations of profits and rates of growth, and partly due to a much more subjective story. But notably, story is difficult to define. It’s driven by a combination of founder narrative, competitive positioning, spin, news cycles, and I think, investor and employee hope. 

 

Bloomberg terminal

To some degree, story is what they say in the news. Business tales told by The Wall Street Journal, CNN, CNBC, Bloomberg, Investors Business Daily, Fox Financial, The New York Times, Reuters, The Financial Times. Founder and exec profiles in Wired, Vanity Fair, Forbes, on Verge, MarketWatch, and so on. Their articles are made of a combination of factual data and some sort of narrative structure. This may not be the world of analysts from the big Wall Street banks, but it is the stuff of rationality and decision-making for investors large and small. Even Blackstone managers and Goldman Sachs traders read news on the train.

  

Obviously, there is a great deal of news. And you must decide what not only the authors of your news but the source. Did you find it on a social media platform? On TV? An actual printed newspaper or a news website?

I don't consider news that I found on Instagram, TikTok or the like. I also don't watch financial TV. This policy gets lots of pushback from inhabitants of that universe. TV folks like to believe they are the center of the media landscape for something which moves as fast as markets. How else to get minute-by-minute updates and analysis? They might be right about that, and certainly there are some super smart TV journalists who do a great job explaining what's happening in the stock market. But for me, as a delivery medium, TV with its always-on breaking-news bent encourages trades. On TV, there's always a reason to buy a stock to take advantage of a moment, or to sell a stock to get ahead of a bad turn:

"Obviously a merger between these two industry giants could completely alter ..."

"Just this morning we started getting word that Congress is looking into unfair practices  ..." 

"If we look at where this business was just weeks ago, today's stop-down would indicate .."

Yet I don't want to trade more. I want to trade less. Study after study shows that trading on news equals more churn in a given portfolio, and more churn— trying to catch and leverage those daily bumps up and down— negatively impacts returns. I'm not buying stocks, I'm buying businesses. The goal is to own those businesses for many years.

Choose news sources you trust, because while the facts might (or might not) be the same from most media outlets, how the story is told will affect your view of the subject company. You’ll learn to separate information relevant to  your long term share ownership from information whose impact will fade in days or weeks. You’ll learn that both market corrections and economic recessions are temporary conditions. You’ll start to recognize that today’s scandal could turn out to be tomorrow’s publicity. That one or two quarters of lousy earnings generally will not break a business. That business leaders are humans and so sometimes make mistakes or act like idiots. Likewise, that a brilliant leader in one arena is probably not a genius in a totally dissimilar field.

 

As I’ve written here, presidential elections rarely move equity markets much over time. Wars overseas too, unless you’re heavily invested in commodities— or defense contractors. Tariffs change things considerably for many companies and even for the economy, but they are unstable, usually imposed and dropped in a few years. Interest rates are cyclical. Some businesses do well with lower rates while others do well with higher ones, and when the cycle changes so, to some extent, do those businesses’ prospects. Some next big things are just momentary fashions (3D printing, ‘atheleisure’) while others can completely redefine the economy (online retail, artificial intelligence).

 

When I’m reading news, I’m looking for mentions of companies I own, of course. But also for news of their competitors, and news of their industries which could impact my businesses. I want to know that both the European Union and our current administration are serious tech watchdogs challenging monopolistic behavior. I want to know that social media reach continues to grow and is becoming our most dominant consumer advertising platform, and misinformation source. I’m looking for warming business trends that might have legs (computer and network security, big data analysis, luxury goods in China). I’m looking for what’s maybe not as hot (environmental social & governance investing, or ESG). I want to know what’s expected to happen in medical and bio-tech and real estate as the baby boomer generation reaches old age. And I want to know what teenagers are doing with their time and money, because they drive tomorrow’s consumer spending, which ultimately drives markets. I look for clues. I try to see around corners.

 

It's a lot of reading. I’m at this nearly full time, and I can’t begin to absorb it all. But even when I’m on vacation I check the headlines. I’m almost certainly a news junkie. But that makes me a better-informed individual, and that makes me a better investor.

______

As always, tell me what you think. Send your thoughts and reactions here: robin@zagaco.com. 

Your Portfolio in an Election Year

The S&P 500, which I mention regularly here, is typically used a stand-in for the entire US stock market. It is of course only one of three such major financial indexes, but it’s broad and diverse, tracking 500 large U.S. businesses that span all 11 market sectors (utilities, energy, health care, etc). 

 

Since its inception in 1957, the S&P 500 has returned about 12,000% not including dividend reinvestment and depending on how it’s measured. That’s a compound annual growth rate (CAGR) of 7.4%. Add in all dividends issued in that time and the totals would be substantially greater. 

 

So which US presidential administrations saw greater returns in the last 70 years? Again, it depends on how you measure. Average CAGR? Median CAGR? 

 

The S&P 500 managed an average CAGR of 6% under Republican presidents but 9.8% under Democratic presidents. However, the index has achieved a median CAGR of 10.2% under Republican presidents and only 8.9% under Democratic presidents. So when you’re listening to the political blowhards, remember that both teams can correctly claim superior returns.

 

Statistics are fun (and frustrating) precisely because it’s often possible to facilitate the desired outcome by approaching data from different angles. What if instead of looking at the entirety of each administration’s time in the White House, we look at every individual year? From that perspective, the S&P 500 achieved an average annual return of 7% under Republican presidents and 11.4% under Democratic presidents.

 

A touch clearer right? But wait— note two points. First, by looking at each year separately, we are unable to account for compounding, which is a powerful tailwind to any long-term portfolio and without which we are left with generally inaccurate data. Second, by far the two most impactful market ‘crashes’ in the last 70 years occurred under Republican presidents: the 1973 oil crisis and the 2008 Great Recession (2020’s pandemic crash was smaller and much shorter-lived). These outlier events completely skew the numbers— and arguably neither was directly the fault of the sitting president.  

 

What about Congressional control? Do Democrats or Republicans have a better track record of market gains?

 

 

When Republicans held the majority in the Senate or the House, stocks averaged 11.9% and 11.0% respectively. This far exceeded the 6.3% and 7.7% returns when Democrats had the majority. When Congressional control was split (which occurred 26% of the time), stocks performed the best, averaging 13.3% per year. When one party held the White House and the other controlled all of Congress, stocks also did well, averaging 10.1% per year. Stocks' worst performance was anytime one party held all three— the White House and both branches of Congress— no matter which party.  

 

So if a Democratic president and split Congress are the combination generally better for markets, is that the outcome we should hope for? Vote for? Sure, if the only variable we’re interested in is market movement. But most of us cast our votes on a variety of policy preferences. Which would seem to leave us in a quandary facing a major election. Which party is better for broad market gains? Answer: It doesn’t matter!

 

The question itself is absurd, and unhelpful. Markets move based primarily on two complex factors: macroeconomic trends and investor sentiment. The economic side is statistical and measurable:  Are interest rates higher than recent trends? Is borrowing dropping or are debt levels stable? Are we in a military conflict, or a trade war, or a pandemic or housing crisis? But the sentiment side is notoriously difficult to lock down: Are consumers feeling confident or assumptive? Cash-heavy or cash-poor? Greedy or fearful? Markets generally don’t move much (or don’t continue moving) based on the party in power. 

Which means the best advice I can give is the same as ever. Say it with me: 

Always be buying

Ignore the noise

Don’t fret over Trump’s promised tariffs against China or his likely tax cuts for the rich. Don’t worry about Harris’s desire to double down on the child tax credit or to increase housing construction. It won’t mean much to your returns over time. Just keep socking your money away in a simple index ETF like the S&P 500 (SPY) and focus on taking care of your health, your family, your community. 

 

Vote, of course— it’s your duty as a citizen. But when it comes to your porfolio, don’t worry about the elections. 

 

Some Thoughts on Market Turbulence

A wonderful little piece by my colleague Joe Wiggins came in this morning. If like me, you are trying to make sense of the awful market drops the last few trading sessions, this is a reminder of what matters. Link to the article below, and I've reprinted some of the gems. 

https://behaviouralinvestment.com/2024/08/06/i-cant-explain/

I Can’t Explain

AUGUST 6, 2024 / JOE WIGGINS

So, what was it that caused the sell-off in risky assets and sharp increase in volatility? The Fed? The Bank of Japan? The end of an AI bubble? A soft employment number? The yen carry trade unwinding? All of the above? Something else entirely? 

Who knows? The truth is that financial markets are a complex, chaotic and deeply intertwined beast, which makes both predictions and explanations impossibly difficult. Not that this stops us attempting both. For most investors a rationalization of events doesn’t even matter— markets are volatile; sometimes uncomfortable and inexplicable things occur. What’s more important is what happens to us during bouts of market turbulence. This is where the real damage is done.
Here are a few things to bear in mind:

– The fact that people are scrambling around to decipher what happened in recent days should be a salutary lesson in the folly of market predictions. We can’t even give confident explanations for events after they have occurred; what makes us think we can do it before!?

– People who didn’t predict the market sell-off will confidently foresee what is to come: “I didn’t see this coming, I cannot explain what caused it, but I am going to tell you what happens next.”

– When an unpredictable event occurs it unfortunately makes us increasingly susceptible to forecasts. We feel anxious and uncertain, so become even more desperate than usual for a comforting guide to the future.

– Everyone will start to say that “uncertainty has increased”. This cannot be true. It makes no sense to claim that we were more certain about things before an unpredictable occurrence. Markets are always uncertain; sometimes we are complacent.

– Living through periods of market tumult is always challenging, even over short horizons. It is far easier to deal with such spells in theory than in practice.

– A new market narrative will take hold incredibly quickly and everyone will start using a fresh set of buzzwords that are consistent with the current set of events.

– Everything seems obvious after the event. Of course US employment was weakening, of course the Magnificent 7 would come under pressure, of course the yen carry trade was a tinderbox. 

What is happening right now will be the most important thing, and we will easily and quickly extrapolate into the future. Living through periods of turbulence is taxing. It is easy to talk about the long-term, staying invested, and compounding returns when markets are going up. It is an entirely different story when the reverse is true, but these are the times when behaviour really counts.

What's Holding You Back

First up: as of today August 5, Nvidia is down 30% from its June peak—and my post in which I said it was time to start selling. (Apologies— I’m usually more modest. Not often I nail the timing so perfectly!)

 

Now, on with the new post.

 

 What’s Holding you Back

 

It's time.

 

You've been thinking about investing toward retirement forever. You can’t help but know about how fast the market has been moving, how much more can be made in the stock market than in any other investment vehicle. You've noticed a few hero companies whose stocks you wished you owned (Nvidia, Apple, Microsoft..). You've even tucked a little of your paycheck away, preparing to make a move.

 

But you have not actually hired a financial advisor, or opened a trading account, or have any idea what to do. It seems like a lot of work, it's frightening, you're not sure you have the money, and you wouldn't know where to start. What are you going to have to sacrifice? What if you screw it up? 

 

Your path to wealth has been blocked. You’ve been ducking it, putting it off. Let's take a look at your top excuses. 

 

I don't know where to start, or how to set it up, or who to trust.

 

This is so much easier than many people realize. Setting up a portfolio account at an online brokerage like E*Trade or TD Ameritrade is simple and straightforward. Both are easy to navigate, offer a quality, trustworthy service (they are owned by financial giants Morgan Stanley and Schwab, respectively), and they offer lots of online help and service reps available by phone if you get stuck. Both provide loads of information about the market, how it works, trading parameters, and about any particular stocks you're interested in. Both platforms have a relatively tiny minimum account size. They don’t charge for trades— buying and selling equities is free. You'll need to link your existing savings or checking account and then transfer in the opening balance. It’s about as complicated as setting up an account on Amazon. 

[Robinhood, too offers an easy-to-use format, quick setup and no fees. But Robinhood ‘gamifies’ its platform, rewarding you with digital confetti and trumpets, even points (!) each time you buy or sell. Similar to the ‘Likes’ you get following a popular post on Instagram or Facebook, which unavoidably drive when and what you post, I believe all of them incentivize the wrong behaviors. The last thing you want to do is start trading more often. Avoid.]

Of course, you should decide at some point if you want professional help. It’s not generally necessary at the start of your investing career, as your needs are straightforward and simple to achieve on your own. But as your portfolio grows and becomes more diversified and complex, it might make sense to seek assistance. The Wall Street Journal’s Is a Financial Advisor Worth It? (paywall) is a great starting point. The piece describes various types of advisors, benefits and concerns, and expected costs. In some cases, you might not even need or want one. Do a little research to determine whether your needs would benefit at this stage from pro advice.

 

But the biggest hurdle for most folks is actually sitting down to deal with it. It never seems easy or convenient, so it’s like steam cleaning the carpet or painting the laundry room— it gets forgotten or put off until years have gone by. Don’t let that happen.

 

I haven't done it because I don't have enough cash to invest. 

 

But you do. Most working people can find at least a few hundred or even a few thousand per year if they get just a little more disciplined— and if they transfer a little cash into their investing account automatically with each paycheck. 

 

It doesn't take much to begin: there are plenty of great companies with share prices under $100. Even when a share is more than that, most brokerages allow purchases of partial shares: you enter how much you have to invest, and the system tells you how much you can buy. Once you do, sit back. 

 

Watching your money earn for you, while you're busy working or sleeping or vacationing or otherwise completely ignoring it, is among the greatest pleasures. Why toil endlessly for your income when you can eventually teach your money to the heavy lifting? You'll want to do it more. Unlike nearly any other activity, the secret to investing is not to do more, it’s to do less. The harder you work, the more you trade in and out, the worse your returns. Learn to let it ride.

 

I usually advise to invest any and all funds you are confident you won’t need for at least three years. Rainy-day fund, nest egg stuff. Then set up your checking account so that 5% of your direct-deposited paycheck automatically transfers into your portfolio. You’re a lot less likely to spend money you don’t see, and you can probably withstand a 5% hit to your cashflow to pay yourself forward like this. You might even throw in part of a bonus, or ‘found money’ from finally selling that stuff in the basement. It will add up! Then increase the dollar amount or even the percentage over time as your income rises. 

 

 

I haven't done it because it's tons of work and it's scary. What if I blow it?

 

What does your savings account pay you in interest per year, one one-hundredth of a percent? Why don’t the banks just admit that’s effectively zero? And in the US, the average annual inflation rate has generally been 3-6%. Which means if you're keeping your cash in savings you're constantly losing money. 

 

Doesn’t it make you mad that your savings is worth less every year? Of course! But if instead you put that cash to work for you, even in a simple S&P 500 index fund you’ll average 5-10% per year more or less forever.

And you absolutely don’t have to pick stocks to achieve impressive returns. Stock-picking is more art than science. It requires study and experience to choose well and you need a strong stomach to endure the inevitable slides. But investing your hard earned savings in a couple of broad stock indexes over time turns out to be a low-risk high-reward way to capitalize on the markets. At very low cost, exchange traded funds (ETFs) trade just like stocks but offer broad exposure to an entire index with one trade.

• SPY or VOO for the S&P 500 index
• ONEQ for the Nasdaq composite index 
• QQQ for the Nasdaq 100 index 

A broad-index ETF like these will rise and fall week to week but will grow over time. In the long term you basically take on broad economic risk but get rid of individual-company risk. If you always put in cash you don’t need for a few years, and you ride through a few inevitable recessions without panic, there will always be more in the future.

 

I won't pretend it isn't scary. It’s not Monopoly money. If you choose individual stocks instead of or alongside your index funds, you will inevitably make some bad choices (after 30 years I still blow it regularly). There will be some losers among your investments. That’s normal, and it an essential part of learning to do this, so don’t let it get to you. But if you read or reread this blog (start here), you'll have a good idea what you're looking for and how overall you can make big gains over time. That's the key: over time. You don’t want to get rich quick; you want to build wealth slow.

This chart demonstrates the estimated value of the Dow Jones Industrial Average stock index from George Washington’s presidency to now. Wouldn’t you want your money to do that?

There is no faster-appreciating asset class than stocks, no better way for your dollars to multiply on their own than by purchasing shares of a smart and growing company or a broad and stable index. If you're looking for overnight riches, as I've said before, look somewhere else. But we already know you're patient, or you wouldn't have read this far. You can succeed in the stock market. 

 

You just need to get started. Right now: heck, compared to last week, the whole market is on fire sale this week! What a great time to begin!