Ideally, we would all have $100k+ in our trading account. That way we could allocate at least $10k into 10 different positions as I suggest in my eBook. Commissions would be a rounding error on trades of that size. Obviously though, that’s not realistic for everyone. We all have to start somewhere and scraping together even $10,000 to invest is no small feat and an accomplishment one should be proud of.
Unfortunately though, it’s very difficult to grow an account of that size. With 10 positions of $1,000 a piece, commissions become much more of an issue. For example, taking into account a single entry and exit at $9.99 a trade at TD Ameritrade, you would start out each trade 2% in the hole! If you stagger your entry or exit, a strategy I sometimes advocate, you will have to make even MORE, just to break even!
All that said, here are my recommendations for those trying to grow a small account:
Passive Investment via VTI
Passive investing is not something we generally advocate here at DIY Investor. However, actively trading a small account is a great way to potentially have commissions and small losses grind the size of your account down to a nub. This is a case where it MAY be appropriate to consider putting that money into a low cost ETF that provides exposure to the ENTIRE US stock market. For this approach, I recommend the Vanguard Total Stock Market ETF (VTI) that sports a rock bottom fee of only 0.05%. Further, you could look to add to this position anytime the stock market sags. Obviously, this tactic is not without risk. You could happen to buy in at a multi-year stock market top and be forced to extend your hold time out for years or even DECADES just to be made whole. That said, the US stock market has an uninterrupted history of rising over the long haul and the ~2% annual dividend yield will help smooth out the bumps to some extent.
Reduce the number of positions and focus on ETFs
Instead of having 10 positions of $1k each in a $10k account, you could look at dividing the account into 4 positions of $2,500 each with at least 3 of these positions invested in ETFs (or cash). To state the obvious, stocks are risky; especially the high valuation, growth stocks that I prefer. Any of these companies can unexpectedly preannounce lowered earnings or growth guidance, announce a secondary offering, or have a scandal involving upper management come to light. In any of these types of situations, you could easily be facing a double-digit gap down overnight. With 10+ positions, a single blowup won’t have an outsized impact on your account the way it would if you only hold a few positions. One way to mitigate this risk, is to shun concentrated exposure in a single stock in favor of an ETF. ETFs provide instant diversification. They aren’t likely to fall apart the way an individual stock can. The flipside though is that ETFs generally won’t have the explosive upside potential of a growth stock. For example, with an ETF you’re not likely to see a near 15% gain in two weeks like we are with OCLR, our 821x model trade. But again, never forget that your primary job as a DIY Investor is to manage risk. Throwing caution to the wind because you let greed get the best of you is a fantastic way to blow up your account!
Add margin to double your purchasing power
If you know how grow to your investment account, it follows that the more money you have to invest, the more money you will make. Multi-millionaires from Warren Buffet to Donald Trump understand this and are therefore not shy about leveraging debt to compound their wealth at an accelerated pace. We can employ this very same tactic by adding margin to our trading account. With margin, the cash and securities in your account amount to a 50% down payment on a line of credit provided by the brokerage; effectively doubling your purchasing power. It should go without saying that while margin allows you to grow your account balance twice as fast, it can also destroy your investment capital at double speed as well. Use margin responsibly, if at all.
That said, if you are disciplined, I believe deploying margin is an excellent strategy for growing a small account. You can use it to increase your position size and/or add more positions. If you would like to pursue this tactic, one online broker stands head and shoulders above the rest; Interactive Brokers (IB). As I write this, an IB margin loan rate on an account size of less than $25,000 is 1.91% compared to TD Ameritrade’s 8.75%. Furthermore, the commissions are also significantly lower, provided you’re not completely inactive.
I used to have five trading accounts at five different brokers. Now, not counting my IRA, I basically ONLY use Interactive Brokers. Only you can decide if it’s appropriate to use margin in your account, but it is nice to have the option available. Whatever you do, never forget: USE MARGIN RESPONSIBLY!
After a year long consolidation, the market has broken out to new highs. As I’ve mentioned before, we have to take seriously the possibility that the post Brexit shakeout ushered in a new bull market (or a resumption of the bull market that started in 2009 depending on how you look at it). A bumpy ride higher, north of 2,400 in the S&P 5000, seems quite reasonable.
So how do we ride this potential bull? Sure we can buy an ETF that tracks the S&P 500 like SPY, but that would only yield average results. To generate alpha we need to actively put together and manage a basket of above average stocks that will outperform passive index funds.
One of the most common questions I get is, “What stocks should I buy?” Well, no matter how much I believe in a company I would NEVER put a blanket buy recommendation on ANY stock. I only want to buy a stock when it looks like it’s ready for an IMMEDIATE move higher and there is a stop loss level close by to limit risk. I call the system I use help me identify these optimal entry points 821x.
When I want to add a new position to my portfolio, I scan HUNDREDS of charts looking for 821x buy signals and only enter the very best looking setups. Some of the watchlists I scan through are from paid services and others I have built myself. However, I am going to share with you two of my favorite watchlists that are completely FREE. Both of these lists are focused on companies that are expected to experience above average earnings growth, which is a great place to put our money in a bull market environment.
IBD 50 – you have to subscribe to Investors Business Daily to gain access to the most up-to-date IBD 50, however, you can get a decent idea of what’s on the list for free by checking the holdings of the FFTY ETF.
Riding these stocks is actually a lot like riding a real bull. You are likely to take plenty of bumps and bruises along the way when a trade doesn’t play out the way you hoped it would. You’ll also likely experience the frustration of getting “bucked off” a big winner before it makes it’s run like we did in OMN and we almost did in NTG. If it was easy, then everyone would be doing it. However, if you do your homework and follow your trading system, you’ll come out of this bull run with a lot more money than you had beforehand.
“News” that George Soros is shorting stocks grabbed headlines once again this week. I don’t see why this is getting people so worked up. Soros has supposedly been making big bearish bets since the beginning of the year. He’s been warning of a repeat of the 2008 financial crisis and apparently has a 2.1 million share put option against the S&P 500.
I have no clue if George Soros is right. However, I do know that “news” like this does nothing to help us make money. We make money when we position our trades in the direction of the 8 and 21 day moving averages. Right now these moving averages are rising, so we are bullish and long stocks. In fact, this week the S&P 500 poked through the highs of last November, essentially negating the macro pattern of lower highs and lower lows that has controlled the big picture over the last year.
The only argument bears can make now is that this was a failed breakout which will lead to a fast drop lower.
I will grant that this is a possible scenario. However, the weight of the evidence we have right now still points to higher prices.
If Mr. Soros and the bears turn out to be right, we will have plenty of time to change our stance and position our portfolios accordingly. We would lock in profits and raise cash as our holdings give us 821x sell signals one by one. We could look to move some money into other asset classes such as bonds and/or gold. Finally, we may take bearish bets against stocks alongside Soros by purchasing inverse ETFs,
We will have sufficient early warning.
We have a plan of action.
There is no reason to fear.
A dangerous misconception many DIY Investors have is that our job day-to-day is to “make money”. Obviously, that is the outcome we are hoping to achieve, but it is not what we actually do. Remember, we have no control over the direction of the market or of our holdings at any point in time.
No, our primary job is to manage risk. Day in, day out this is what we are actually doing. The stock market can provide life changing monetary rewards, but with those rewards come enormous risks. The only way to safely gain exposure to the rewards of trading is to strictly define and manage the risk you are taking.
There are two primary ways we do this:
Our position sizing tool combines these concepts. I encourage you to play around with it so you can get a good handle on how much you are risking on any given trade.
There is, however, another often overlooked component of risk management that is perhaps even MORE important than the ones above: patience.
By this I mean having the discipline to allow marginal or higher risk trade ideas go without you while patiently waiting for the BEST, low risk, high probability setups.
Warren Buffett has a famous quote that’s relevant: “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.”
The fact is, every time we enter a trade we are putting our money at risk. Therefore, we should always take a moment beforehand to ask ourselves, “is the perceived reward worth the risk?” Be picky. Be patient. I promise you, it will pay off.
This concept comes to mind when looking at a chart of the S&P 500. The market has just run 15% higher in about two months. It’s just below a declining trend line that connects the closing highs from last July and November.
If the current rate of ascent continues, we could be looking at new all-time highs in just a few weeks! However, what is most likely to happen? Personally, I think that after such a big run and at an important trend line, it’s more likely that the market will pull back in this area. This doesn’t necessarily mean that we should get short. The market doesn’t HAVE to pull back. And if it does, keep in mind that it would actually be bullish for the market to put in a definitive higher low before breaking the macro pattern of lower highs and lower lows.
The bottom line is we have a short term bullish market still within a larger bearish look. These mixed messages are about to come to a head so I believe the best course of action right now is patience. It makes no sense to increase exposure to risk in the face of this uncertainty by taking big bets here. Let’s continue to manage our open positions and patiently observe market action in this pivotal area. There will be plenty of time to pounce when the outlook becomes clearer.
In case you hadn’t noticed, the S&P 500 has had a MONSTER rally since February 11, rising over 14%. Just since the beginning of March, the index has risen over 137 handles!
Knowing this, look at the headlines below:
Has any of the hand-wringing about the, at times, anemic volume of this rally been helpful? ABSOLUTELY NOT!
I understand the disbelief. When I calculated the potential measured move of the bullish “W” formation in the S&P 500 on March 5th, I was skeptical that it would actually be reached. Yet here we are.
Sure this rally is getting long in the tooth. Sure the 200 day moving average is still declining. But we make money when price remains above the 8 and 21 day (exponential) moving averages. Before this rally comes to an end, we are going to AT LEAST need to see a close below the yellow line in the chart above. Getting bearish before that happens makes no sense. These simple principles apply to anything you are trading.
Volume is noise. Tune it out and focus on what makes you money which is price. Like Brian Shannon, one of my virtual mentors, is known for saying: Only Price Pays. Profits made on low volume are just as valid as profits made on high volume.
So turn down the volume and listen closely to what the price action is telling you.
You’ve worked hard to build up your savings account. There’s no reason why you can’t put that capital to work for you. The stock market is an incredibly powerful and convenient tool that allows you to do just that.
But how do you actually go about using this tool to grow your savings?
The Standard Advice
Personally, I’m not willing to settle for mediocre returns from an expensive money manager. I’m also not interested in patiently waiting for my account to recover from a market crash. Been there, done that. No thanks. There is another way.
It really is that simple. So why don’t more people do it? There are a lot of reasons, but for now, let me just address the two excuses I hear most often.
Excuse 1: “It’s too hard”
Repeating this statement is like holding up a white flag. I mean sure, you have to apply yourself and do some work. You do have to learn about managing risk and your emotions. It shouldn’t be a surprise that something worthwhile will take some effort.
But let’s be honest: this isn’t brain surgery. Hell, I can do it! My background is computers and music, not Wall Street. Seven years ago I didn’t know the first thing about stocks. If I can figure this out, there’s no reason why you can’t as well.
Learn the rules of a trend following system like the 821x and then study charts. See how a big winner looks at it’s buy point and vice-versa for big losers. It’s not hard, it just takes practice and repetition to identify the best setups.
Excuse 2: “I don’t have time”
Do you have time to watch TV? Do you have time to play video games? Do you have time to surf the web? I could go on but I won’t. Just answer the following questions and be completely honest with yourself.
Is it worth investing the time it takes to develop a valuable skill that will ultimately lead to increased personal freedom?
Is the short-term sacrifice worth the long-term benefit?
If your actions are not congruent with your answers, perhaps you need to spend some more time on this to figure out the truth. For example, if you continually engorge on junk food, one would have to seriously question the veracity of any claim you make about wanting to lose weight.
Another thing to keep in mind is that the first step is always the hardest and most time intensive. Once you get past the learning curve of a system like 821x, it really should only take a few minutes a night to look through charts and enter orders if any. The cost in time spent is miniscule in comparison to the potential benefits.
So get busy. Don’t be afraid to make some mistakes. Lose the excuses. You can do it!
Some things are within our control. This category is the internal realm which includes our actions, perceptions and attitudes.
Then there is everything else; things we only have limited influence over at best. This is the world external to us which includes the actions of others and nature for example.
Stoic philosophy contends that confusing these categories is the primary source of our unhappiness. How many people fret over things which they cannot control, resulting in unnecessary stress and frustration? There is no reason to allow external events to hold our happiness hostage. We hold the power to avoid this self-imposed trap by simply changing our attitude and focus.
Again, obsessing or stressing about things outside of our control is counterproductive.
Instead, we should focus our effort and energy on those things we actually do control.
I make it a point to live by these principles. Not because I’m such a great guy, but because I’m allergic to stress. Seriously, I detest stress. Stress ages you. Stress makes you fat. Stress weakens the immune system. Stress just plain sucks.
Also, I don’t want to pointlessly spin my wheels. Life’s too short. I only want to invest my limited time and energy on action that counts.
One example of how this principle looks applied is process vs. outcome. We control the processes we develop and follow. However, we do NOT control the outcome of those processes.
Let me give you a real life example. When we were trying to sell our house in San Antonio, it took much longer than expected or hoped. As the summer started to draw to a close, I could feel the stress level my wife and I experienced start to elevate. After every showing, we were consumed with self-doubt, second guessing ourselves with questions: “Are they going to make an offer?” “Why aren’t they calling?” “What’s wrong with this house?” etc.
Eventually I started to remind my wife (and myself) that we don’t control the whether the person viewing the house will buy it or not (outcome) so there is no point in worrying about that. Let’s just focus on cleaning the house and making it appear inviting before each showing (process) and be content with doing our best.
If we focus on improving and following our process, the outcome will generally take care of itself.
Of course, we eventually did sell that house and importantly, we did it while also saving ourselves a lot of unnecessary stress when we changed our focus and mindset.
This principle can be helpful in many areas of our lives, such as if we are trying to lose weight or learn a new skill.
It also happens to be especially useful when trading.
We have absolutely no control whether a stock goes up or down. The only thing we control is when we buy and when we sell.
It’s critical to remember this, especially when we inevitably hit a string of losing trades. It’s easy to lose our confidence which can paralyze us from taking further action. Worse, we may lose our discipline and try to “make it all back” by taking on too much risk and then end up blowing up our trading account.
We must remember to focus on what WE control.
Develop and follow a proven trading system. If you need help, start with my 821x system.
Don’t obsess on whether a trade was profitable or not. Again, you have no control over that. It’s pointless to beat yourself up over a losing trade.
Instead, evaluate how well you followed your trading system. Did you chase a stock that was spiking higher? Did you panic and sell early or get stubborn and hold on too long? Did you break your own rules?
Over time your decision making skills will become congruent with your system. It will become habit. It will become second nature.
Only after you reach this level can you start to gain enough experience to know when a market environment dictates that you deviate from your system. This is the level of the elite performer and is obviously not something a beginner should attempt. It’s just like any other competency. You must start with the fundamentals and internalize them before you can begin to attempt to understand when it may be appropriate to override them.
So learn your trading system. Internalize the rules. Consistently follow your process.
Your trading system should be designed to identify and cut losing trades quickly and let your winning trades run.
Trust that over time you WILL achieve the outcome you desire, an overall increase in wealth.
If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to revoke at any moment. - Marcus Aurelius
Enough about the ineffectual helper.
Where can you find a valuable partner who will actually move the needle in advancing your financial goals?
In other words, how can you actually GROW your savings?
Hard assets such as real estate and precious metals are viable ways to store and sometimes grow your wealth. However, they are illiquid, meaning they are generally difficult and time consuming to sell and transaction costs are high.
Rental properties are an excellent way to grow your savings that I highly recommend. I have a rental property myself and it has been a fantastic investment. Like any investment though, it’s critical that you buy well. In the case of rental properties this means the right price, the right house and the right neighborhood among other things . You also have to be prepared to handle ongoing maintenance which can include things such as fixing leaky plumbing and dealing with late rent checks.
This brings me to my favorite way to growth wealth; the stock market.
Financial markets are one of most powerful and convenient vehicles for wealth creation in the history of world. There’s a reason the wealthiest 10% in America own 81% of all stock assets.
Stocks don’t suffer the same drawbacks that the other asset classes mentioned above do. They are extremely easy to buy and sell (i.e. they are liquid). They don’t require ongoing maintenance the way rental properties do. Another often overlooked advantage they have is you can make money whether they increase or even decrease in value. In general, all other asset classes must increase in value in order for you to make money. However, you can make a fortune in stocks even if the stock market crashes by selling short, buying puts or using inverse ETFs.
I understand though, that there are two major hurdles keeping most on the sidelines:
– lack of time
– fear of losing money
Let me briefly address both of these concerns. Frankly, the learning curve to consistently making money with stocks is actually pretty steep. You will need to spend a significant amount of time initially to develop a trading system that you trust works. However, once you have that down it doesn’t really need to take a long time to manage your portfolio.
The second concern is also a valid one. The stock market is like a minefield. Buy the wrong stock at the wrong time without a robust risk management plan and you can easily blow up your account. At a high level, the key is to cut your losers quickly and be patient with your winning trades. If you do this consistently, you can have more losers than winners and still make money overall. This is because some of your winning trades will represent much larger percentages than your losers. For example, if your position sizes are all the same, a single 25% winner more than makes for four 5% losers
I’m not going to lie. Making money with stocks is not easy. However, the rewards are immense if you can develop these skills. I share the nuts and bolts of one of my trading systems in the 821x eBook. Feel free to take that as a starting place as you start to develop a trading system of your own.