Paper trading is simulated trading, done for practice without real money. It’s a way to test different trading strategies without the risk of losing money, before an investor starts trading with real capital.
The practice gets its name from how investors would once mark down their hypothetical stock purchases and sales — and track their returns and losses — on paper. But today, investors typically use digital platforms to virtually test out hypothetical investment portfolios, day-trading tactics, and broader investing strategies.
How do Paper Trades Work?
What is paper trading? In its most basic form, paper trading involves selecting a stock, group of stocks, or a sector, then writing down the ticker or tickers and choosing a time to buy the stock. The paper trader then writes down the purchase price or prices.
When they sell the stock or stocks, they write down that price as well, and tally up their return. 💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
Pros and Cons of Paper Trading
Paper trading has both benefits and drawbacks. Here are a few factors to consider before you try paper trading.
The Pros of Paper Trading
Build skills: Paper trading is a way to learn and build trading skills in either a bear or a bull market. For new traders, a virtual trading platform offers a way to make rookie mistakes without risking real money. It’s a method to get comfortable with the process of buying and selling stocks, and making sure you don’t enter a limit order when you mean to place a market order.
Test out strategies: Paper stock trading allows for experimentation. For example, an investor might hear about shorting a stock. But they may not know how the process works, and what it actually pays out. Paper trading permits investors to learn how these trades work in practical terms. Or, they might want to try out other strategies, such as swing trading.
Learn about strengths and weaknesses: Paper trading is also a way for investors to learn about their own strengths and weaknesses. Traders lose money in the markets for a number of personal reasons. Some stick to their guns too long, while others give up too soon when the market is down. Some lose money because they panic, while others lose money because they ignore clear warning signs. Paper trading is a way for investors to learn their own tendencies and weaknesses without paying for the lesson.
Keep emotions out of it: Finally, paper trading can help teach investors to keep their emotions in check while the markets are going up and down. Investing with hypothetical dollars can be good practice in the valuable art of making rational decisions in stressful situations and allow investors to find risk management techniques that work best for them.
The Cons of Paper Trading
It’s not real: The biggest drawback of paper trading is that it’s not real. An investor can’t keep the returns they earn paper trading. And those paper returns can lead the investor to have an unrealistic sense of confidence, and a false sense of security. Paper trading also doesn’t account for real-life situations that might require an investor to withdraw money from the market for personal reasons or the impact of an unexpected recession.
The emotional impact is hard to gauge: Paper trading does limit the impact of emotions, but once an investor’s real, actual money is in play, it may be more difficult to reign in emotions. That money represents a month’s salary, or a semester’s tuition, or a house payment, and so forth, so it can be hard to remain calm and keep perspective when the market plunges over the course of a trading day.
Could be misleading: While paper trading offers important lessons, it can also mislead investors in other ways. If a paper trading strategy focuses on just a few stocks, or using one trading strategy, they can easily lose sight of how broader market conditions actually drive the performance of those stocks, including stock volatility, or their strategy, or have an inflated confidence in their ability to time the markets. They need to realize their holdings or strategy may offer very different results in a real-world scenario.
Doesn’t involve the true costs of trading: Another danger with paper-trading is that traders may overlook the cost of slippage and commissions. These two factors are a reality of actual trading, and they erode an investor’s returns. Slippage is the difference between the price of a trade at the time the trader decides to execute it and the price they actually pay or receive for a given stock.
Especially during periods of high volatility, slippage can make a significant impact on the profitability of a trade. Any difference, up or down, counts as slippage, so slippage can be good news at times. Since brokerage commissions and other fees always come out of a trader’s bottom line, paper traders should include them in their model. 💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Live Trading vs Paper Money
When an investor uses live trading, they are using real money to buy and/or sell stocks or other securities. They will confront market fluctuations and need to make decisions, sometimes quickly, about what to do. Live trading can be very stressful, but it does offer the opportunity for an investor to earn money. However, it also comes with the very real risk of losing money.
With paper trading, there is no money involved to lose. But once again, it’s not “real,” so while it may teach you some basics, paper trading does have limits and drawbacks, as detailed above.
Paper Trading in the Digital Age
Wondering how to paper trade? There are different ways to do it. Some investors swear by a tangible notebook-and-paper approach to paper trading, others keep a spreadsheet, which allows them to track other factors involved in the investment, including the exact time of the purchase and sale, volume, holding period, index direction, overall market volatility, and other factors they may be studying.
But while paper or spreadsheets are valuable tools, most investors testing out their trading chops or portfolio-construction skills now prefer virtual trading platforms, which pit a hypothetical portfolio or strategy against real markets. These platforms mimic the look and feel of an actual trading platform, but deal only in hypothetical assets. Understanding a platform can make it easier to transition to real-life trading in the future.
On these platforms, an investor will start with fake money and begin trading. As they do, they can track the fluctuations in an account’s value, along with profit and loss, and other key metrics. Many trading simulators offered by online brokerages allow investors to virtually trade in real-time during live markets without risking their money. For some investors, this can be a valuable experience before they dive in with real money–and the potential for real losses.
Recommended: Managing the Common Risks of Day Trading
How to start paper trading
If you’d like to try paper trading, be sure to research your investments, just like you would if you were investing for real, and use the same amount of paper money you would use in real life. This will help mimic the actual experience.
If you choose to paper trade with a pencil and paper, you can simply choose a stock or group of stocks, write down the ticker, and pick a time to buy the stock. You then write down the purchase price, or prices. When you sell the stock you record that price and then figure out your up their return.
If you decide to use a virtual trading platform, you’ll need to choose a platform. There are many free platforms available. You may want to look for one that has live market feeds so that you can practice trading without delays.
Setting up a Paper Trading Account
Once you’ve selected a virtual trading platform, you’ll set up an account. Simply log onto the platform and follow the prompts to set up an account. Once you’ve done that, there should be a “paper trading” option you can click on.You’ll need to select a balance and then you should be able to start simulating trading.
The Takeaway
Paper trading can be a way to learn about investing. By keeping track of all trades, and the losses or gains they generate, it creates a low-stress practice for examining why certain stocks, and certain trades, perform the way they do. That can be invaluable later, when there’s real money on the line.
However, remember that paper trading isn’t real. In real-life trading with an investment account, you’ll have the potential for gains, but also for losses. Make sure you are comfortable taking that risk.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
Do you make money from paper trading?
No. With paper trading, there is no real money involved, so there is no opportunity to make (or lose) money. Paper trading is a way to learn about trading without risking money.
How realistic is paper trading?
Paper trading involves using real trading strategies and simulates a real market experience. However there are no real losses or gains since no real money is involved. Because of that, it doesn’t convey a fully realistic experience.
Is paper trading good for beginners?
Paper trading can be a way to learn the basics of investing. A beginner could build their skills and test different strategies without risking loss. However, paper trading can be misleading because there is no real risk involved. An investor might be tempted to take more risks than they would in a real life investing scenario, for instance.
Why is paper trading important?
Paper trading could be important because it allows beginning investors to practice trades, build their skills, and test different market strategies, without the risk of losing money. However, it can’t replicate the experience of real trading with actual money and the potential to possibly lose money, which someone who tries paper trading should keep in mind.
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If you find yourself with $100,000 to invest your first job is to decide what you need from this money – income or growth. You will also need to determine your risk tolerance, time horizon, and the level of involvement you want to have with your investment.
If you want long-term growth with little to no involvement, then index funds or mutual funds might be your speed.
If you are looking for income then you might consider bonds or real estate, depending on how much involvement you want to have.
But no matter what you decide, make sure that your financial house is in order before you start and ensure that you are well diversified as you invest.
Before You Start Investing
If you’ve received a $100,000 windfall you’ll want to make sure your financial house is in order before you begin investing it. First, ensure that you have an emergency fund in place. The last thing you want is to invest this money and then need to sell an investment because you have an emergency. Next, you’ll want to consider paying off any debts you have.
Emergency Fund
Having an emergency fund is an important part of a solid financial plan. It can provide a safety net during difficult times and help you stay on track to achieve your long-term financial goals. If you don’t already, you’ll want to have six months of living expenses saved up. Having to dip into your investments unexpectedly can disrupt your plans to save for the future and may result in penalties, taxes, or just poor investment timing.
You’ll want this money in a safe and easy-to-access place. A high interest savings account is likely your best option.
Here are our favorite high yield savings accounts.
Pay off debt
Before you start investing consider paying off your debts. The interest rates on most consumer debts, such as credit cards and personal loans, are typically higher than the returns you can expect to earn from most investments. By paying off high-interest debt first, you are effectively earning a guaranteed return on your money equal to the interest rate on the debt.
Paying off debt also reduces risk and frees up cash flow, which can put you in a better position to invest for the long term, as it makes it less likely you will need to access your investments for emergencies.
Determine Your Investment Needs and Risk Tolerance
The best way for you to invest $100k will be different than how someone else should invest $100k. What you want to use the money for, how soon you’ll need it, and your risk tolerance are all factors in determining the best way to invest.
What are Your Investment Goals
You’ll first want to determine your investment goals. Ask yourself what you want to achieve with your investments. For example, do you want to save for retirement, build a college fund for your children, or save for a down payment on a house?
Each of these goals would require different investment vehicles. Also, keep in mind that you don’t need to use all the money for one thing. You can work towards several goals at once.
If your goal is to use the money to provide income, you would consider different investments than you would if your goal was to grow the balance of the account.
What is Your Risk Tolerance?
How much risk you are willing to take? This really means – how comfortable are you with the potential for losing money.
In general, the more risk you are willing to take the more potential growth there is. For example, if you have a very high risk tolerance you could consider investing in emerging markets. If your tolerance for risk is low, you’ll want to consider more stable investments such as bonds or real estate.
The longer your time horizon the more risk you can take since you will have longer for the markets to recover before you need the money. This is why you’ll want to have a robust emergency fund – so you don’t need to access the funds before it’s time.
When Will You Need the Money?
Consider the time frame you have to achieve your financial goals. Are they short-term goals that you want to achieve within the next few years, or are they long-term goals that you want to achieve over the next several decades?
If you are investing for the long term (over 5 years) then depending on your risk tolerance you can afford to be more aggressive, consider a portfolio of well-diversified stocks and bonds. If you are saving for retirement you’ll want to consider a tax-advantaged account such as an IRA.
If you are saving for a short-term goal (less than 5 years) such as a down payment on a house, you’ll want something with less risk and easier access, such as a CD.
How to Invest $100k
Stocks
If you have $100,000 to invest, stocks will likely be a part of your portfolio. You have several options on how to buy stocks.
Index funds
If you are new to investing in stocks, or just don’t have a lot of time to research and manage a portfolio, then index funds, mutual funds, and ETFs are great options. These investments are mostly hands-off, yet allow you to get access to a diversified portfolio.
Index funds aim to match a particular index that tracks the market. For example, you could invest in a fund that tracks the S&P500 or the Dow. You could even buy a fund that tracks the stock market as a whole.
The benefits of index funds are that it’s easy to get a lot of diversification and they often have very low fees as they require very minimal human research and management.
The drawbacks of index funds are that they aim to match the returns of the index they track, so you will never outperform the index – however, they also aren’t likely to underperform.
Also, with index funds you can become over-invested in a particular sector without realizing it as there can be an overlap of companies across different indices.
Mutual funds
Mutual funds are similar to index funds in that they pool together funds from multiple investors to buy a collection of stocks. The difference is that they are run by professional managers who follow the investment objectives of the fund, rather than following a specific index.
The benefits of mutual funds are good diversification and professional management. Unlike index funds, mutual funds are not limited to a set selection of investments. As long as the investments follow the stated objectives of the fund the manager is allowed to invest as she thinks best based on her knowledge of the markets and investment experience.
The drawbacks of mutual funds are fees and the possibility of underperformance. Since mutual funds are managed by a real person they have higher expenses than index funds, which are managed by a computer. This will reduce your returns.
Mutual funds also have the potential to underperform the market. While index funds aim to track a sector of the market they typically won’t under or overperform. Mutual funds have a lot more flexibility, so while they may overperform some years, they also risk underperforming as well.
ETFs
Exchange-Traded Funds, are a type of investment vehicle that allows investors to buy and sell a diversified portfolio of stocks or bonds in a single transaction, similar to an index fund. However, ETFs are traded on stock exchanges like individual stocks, and their prices fluctuate throughout the day as investors buy and sell shares.
ETFs are designed to track the performance of a specific index or benchmark, such as the S&P 500, and their holdings are usually disclosed on a daily basis. This allows investors to gain exposure to a broad market or sector with a single investment.
The benefits of ETFs are low expenses and diversification. Because they are managed by computers, like index funds, they tend to have very low expense ratios. They also allow you access to a broad range of investments.
The drawbacks of exchange traded funds are trading costs and the potential for underperformance. ETFs have the potential to be actively traded – if you partake in this activity you will likely have fees when you buy and sell shares. Also, if you actively trade shares you have the potential to underperform (or overperform if you are luck) the market.
Individual Stocks
Rather than buy collections of stocks via a mutual fund or ETF you could invest in individual stocks, if you have the time, knowledge, and inclination to do so.
Investing in individual stocks has more risks due to the fact that it’s difficult to build a diversified portfolio. Plus, you are also limited by your own knowledge and research abilities.
However, some people love to research stocks and investing strategies. If that’s you, and your risk tolerance is high enough you may find a lot of satisfaction in choosing your own investments. You could potentially beat the market – although you could also underperform the market as well.
Even if this appeals to you, I recommend investing in individual stocks with only a small percentage of your portfolio, while the bulk of your money remains in index funds or mutual funds.
Here are our favorite stock trading apps.
Dividend Stocks
If income is your goal you may want to consider dividend stocks. These are stocks that pay out a portion of their earnings to shareholders in the form of dividends. Dividends are typically paid out quarterly, and the amount of the dividend can vary depending on the company’s earnings and dividend policy.
Dividend stocks are typically issued by established, mature companies that have a history of stable earnings and strong cash flow. These companies may not offer high growth potential, but they are often viewed as more stable and less volatile than growth stocks.
The benefits are that they can provide investors with a regular stream of income and lower volatility than growth stocks.
The drawbacks are they have limited growth potential and can make dividend cuts at any time.
Here is how to find the best dividend paying stocks.
Real Estate
If you are looking to invest $100k you’ve probably thought of real estate. You have a lot of options when it comes to owning property. You could buy an individual property to rent or you could be more hands off with REITs or crowdfunding.
Buying Rental Property
Buying individual rental properties can be an attractive investment option for individuals seeking to generate passive income and build long-term wealth through real estate.
The benefits of real estate is passive income and appreciation potential. When you have a rental property you get rent each month from your tenants and the value of the property will likely go up over time. If the rent is high enough to cover all your expenses you could have a fairly passive income stream.
The drawbacks of real estate are that there are high upfront costs as well as ongoing costs. There is also market risk and tenant risk.
Plus, real estate is illiquid. If you want to sell it will take weeks, even in a strong market. If the market is weak at the time of the sale it could potentially take years to find a buyer and make a sale.
REITs
REIT stands for Real Estate Investment Trust, which is a company that owns or operates income-producing real estate properties, such as apartments, shopping centers, office buildings, hotels, and warehouses.
REITs allow individual investors to invest in real estate without having to purchase, manage, or finance the properties themselves. Instead, investors can buy shares of a REIT, which represent ownership in the underlying real estate portfolio.
This eliminates many of the drawbacks of individual real estate. You can participate in the rental income and price appreciation of a property without having to deal with tenants or broken hot water heaters.
They are also more liquid than individual properties. Shares of Real Estate Investment Trusts are traded like stocks, so if you want to sell a portion of your holdings you can easily do so.
REITs are the only way to get in and out of real estate quickly.
Real Estate Crowdfunding
Real estate crowdfunding is a relatively new form of investment that allows multiple real estate investors to pool their money together to invest in real estate projects. Crowdfunding platforms provide a digital marketplace where investors can browse and select from a range of real estate investment opportunities, typically offered by developers, sponsors, or real estate companies.
Crowdfunding is like a cross between buying an individual property and REITs. Like REITs, it allows you to invest in real estate for a lower entry amount and avoid having to be a landlord.
However, unlike REITs (and more like owning an individual property) your money is invested in a particular property, rather than in a fund that has multiple properties. The rent you receive and property appreciation is linked to your specific property.
Also, crowdfunding is typically not very liquid. Crowdfunding platforms usually have a set amount of time, often five years or more, before you are allowed to draw your funds out of the investment.
Here’s more information on real estate crowdfunding.
Bonds
Bonds are a type of fixed-income security that represents a loan made by an investor to a government, corporation, or other entity. In essence, an investor who buys a bond is lending money to the bond issuer in exchange for regular interest payments and the promise of a the return of their principal investment at the bond’s maturity date.
If your goal is to generate income, then bonds are worth considering. They can provide a regular stream of income in the form of interest payments, which can be particularly attractive for investors who are looking for steady, predictable income.
Bonds can provide diversification in an investment portfolio, as they tend to have a lower correlation with stocks and other assets. This can help to reduce overall portfolio risk and volatility.
However, bond prices and yields are inversely related, meaning that when interest rates rise, bond prices tend to fall. This can result in capital losses for bond investors. Also, bond issuers may default on their payments, which can result in capital losses for investors. You can lessen credit risk by only buying bonds from governments and large stable companies.
Here’s how to invest in bonds.
Certificates of Deposit
Certificates of Deposit similar to a savings account except that your money is locked away for a set period of time in exchange for a higher interest rate. They are good investments when your primary goal is safety of principal but don’t need access to the money for a fixed period of time.
The benefits of CDs are that they are very low risk. Your money is insured and not invested in any market so you have no risk of losing your principal. They also offer CDs offer a fixed rate of return, which is nice if you are looking for a predictable source of income.
However, they also have fairly low returns. Depending on the interest rate environment the returns may not even keep up with inflation – so you may even be actually losing purchasing power over the long term.
Here are the best CD rates.
Taxes
Investing means dealing with taxes – even investing in a retirement account will have some sort of tax implications.
Capital Gains Tax
If you are investing outside of retirement accounts you will want to consider capital gains taxes. Capital gains occur anytime you sell an investment for more than you paid. If you’ve held the asset for less than a year when you sell, then you will be taxed at your ordinary income tax rate.
However, if you’ve held the asset for more than year you will be taxed at your capital gains rate, which is likely 15% (and likely lower than your ordinary income tax rate).
Capital losses can also occur. If you sell at a loss you can use your losses to offset any other capital gains you had that year. If your losses exceed your gains you can carry them over indefinitely.
Income
If you are receiving income from your investments, for example, rent, dividends, or interest payments you will likely pay your ordinary income tax rate on this income.
An exception is some dividends are tax advantaged. Dividends can be “qualified” or “non-qualified” which will affect their tax status. Here is some information from the TurboTax on this.
Also income from government issued bonds may be tax advantaged as well. Income payments from municipal bonds are exempt from federal taxes and state taxes if the issuing state is also the state where you live.
Income from federal bonds are exempt from state taxes and local taxes.
Retirement Accounts
If you are investing for retirement then using a tax advantaged retirement account is your best bet.
Common accounts are Traditional and Roth IRAs. Both are individual retirement accounts but they are taxed differently.
Traditional IRAs give you a tax break when you contribute to the account but withdrawals in retirement are considered taxable income and you’ll pay taxes as your ordinary income tax rate.
Roth IRAs do not receive a tax break when you contribute but withdrawals in retirement are tax free. Meaning the growth is actually never taxed.
IRAs have annual contribution limits. You can find out more about that here.
Diversify
As you start investing, keep in mind that you don’t have to invest your money all in one place. If you like the idea of long-term growth but feel nervous about putting it all in the stock market, that’s ok. You can split it up between an index fund and a real estate investment trust.
Maybe you sock most away in a well-diversified index fund but want to keep a little bit set aside to trade in individual stocks and try your hand at individual stocks.
It’s your money and ultimately you get to decide what to do.
Hire a Financial Advisor
If you don’t feel confident enough to invest $100k on your own you can always ask for help from a financial advisor. They typically have expertise in various areas of finance, such as investments, retirement planning, tax planning, and estate planning.
Financial advisors get paid in a few different ways:
Commission-based: Some earn commissions on the products they sell, such as mutual funds, insurance policies, or annuities. This model can create a conflict of interest, as advisors may be incentivized to recommend products that may not be in the client’s best interest.
Fee-only: Fee-only advisors charge clients a fee for their services, typically based on a percentage of the assets they manage. This model eliminates the potential conflict of interest associated with commissions, as advisors are not incentivized to recommend specific products.
Fee-based: Fee-based advisors charge both a fee for their services and may also receive commissions for the products they sell. This model can also create a conflict of interest, as advisors may be incentivized to recommend products that generate higher commissions.
Hourly or project-based: Some financial advisors charge clients an hourly rate or a flat fee for specific projects or services, such as creating a financial plan or reviewing investment portfolios.
It’s essential to understand how a financial planner is compensated before working with them, as their compensation structure can influence the advice they provide. Fee-only financial advisors are often considered the most transparent and unbiased, as they are not incentivized to recommend specific products.
It’s important to find an investment advisor that you trust. They will be helping you make some of the most important financial decisions of your life.
How to find a financial advisor.
Summary of How to Invest $100k
Investing $100,000 can be an overwhelming task, but with the right approach and mindset, it can be a fruitful one. The first step is to create an emergency fund/ savings account and pay off high-interest debt to ensure financial stability.
Ultimately, the key to successful investing is to develop a diversified portfolio that aligns with your investment goals, risk tolerance, and financial objectives. With the right strategy and mindset, investing $100,000 can be a smart move towards securing a better financial future.
One of the most powerful financial combinations is the ability to invest and bank through the same financial institution. But J.P. Morgan isn’t just any financial institution. It’s the largest bank in the U.S., and it also offers the ability to engage in self-directed trading–commission-free. There are many brokerage firms you can invest with, but this is the only one with the power of J.P. Morgan behind it!
If you’re already a J.P. Morgan customer or client–either with a deposit account or through one of their many top-of-the-line credit cards–you should know that you can also invest through the company. J.P. Morgan Self-Directed Investing offers commission-free trades for self-directed investors, as well as a low-cost managed portfolio option. You can open an account with no money, and handle all your trading and account monitoring through the mobile app. And if you’re not already a J.P. Morgan customer or client, you may be interested in investing through the largest banking organization in the U.S., with all the advantages and benefits that provides.
What is J. P. Morgan Self-Directed Investing?
J.P. Morgan is the largest bank in the United States and the sixth-largest bank in the world, with assets of nearly $2.7 trillion. Founded all the way back in 1799, the bank currently has more than 5,000 branches operating in 36 states. J.P. Morgan is also one of the leading providers of credit cards.
But while the company is best known as a bank, it’s also one of the largest asset managers in the world. J.P. Morgan’s asset management arm has nearly $3 trillion in assets under management (AUM), while its investment and corporate banking arm has more than $25 trillion in AUM.
Given the company’s experience in managing investments for individual and business clients, as well as its massive banking footprint across the U.S., it’s only natural that J.P. Morgan would eventually roll out a retail brokerage platform for individual investors. That platform is J.P. Morgan Self-Directed Investing. Originally launched as You Invest in 2018, J.P. Morgan Self-Directed Investing is already showing plenty of promise with innovative investment options.
J. P. Morgan Self-Directed Investing Product Features
J. P. Morgan Self-Directed Investing offers two different investment programs. Self-Directed Investing (SDI) is a self-directed investment platform, while SDI portfolios offers several fully managed investment plans for those who want to turn the investing job over to the professionals.
Self-Directed Investing
This is the trading account offered by J. P. Morgan. There is no minimum initial investment required to open an account. Available accounts include individual and joint taxable brokerage accounts, and traditional and Roth IRA accounts. There, you can trade individual stocks, exchange-traded funds (ETFs), options, fixed income securities, and mutual funds.
Self-Directed Investing offers commission-free trades in thousands of securities. You can manage your portfolio online or on the go from your mobile device.
The platform also has resource pages that can help with basic investing, investing strategies, planning, and market insights.
Portfolio Builder
This tool helps create an asset allocation based on your investment goals, time horizon, and risk tolerance. This tool requires a minimum account balance of $500. It can be used to select securities within the designated portfolio allocations, and even places trades for you.
Self-Directed Investing Portfolios
If you prefer to have your investment portfolio professionally managed–or if you want to add managed portfolios to your self-directed investing–you can take advantage of SDI Portfolios.
You’ll need a minimum of $500 to open an account, and the account will be managed for a single annual percentage fee, regardless of account size (see J.P. Morgan Self-Directed Investing Pricing & Fees below).
The specific mix in your portfolio will depend on your investor profile, which may be Conservative, Moderate, Growth, or Aggressive. A Conservative portfolio will be more heavily invested in fixed income and cash investments, while Growth and Aggressive will be slanted towards stocks. The Moderate portfolio will use an equal mix of both.
After you open an account, you’ll determine your asset allocation and your portfolio is put in place–it will be rebalanced as necessary. At that point, all you’ll need to do is fund your account, and all aspects of your portfolio will be fully managed for you.
If self-directed investing isn’t for you, you can work with a J.P. Morgan advisor, or schedule a check-up to see if you’re on track to meeting your investment goals.
Self-Directed Investing Portfolios Glide Path
Your portfolio allocation doesn’t remain static. SDI Portfolios employs a Glide Path, adjusting your portfolio as you age. Your portfolio will be gradually reallocated toward a more conservative mix as you approach retirement and have less time available to recover from losses that may occur in a down market.
J. P. Morgan Self-Directed Investing Pricing & Fees
Self-Directed Investing Trade
There are no fees to open and maintain a SDI Trade account. Trading commissions are as follows:
Stocks and ETFs: You’ll have unlimited commission-free trading online with stocks and ETFs. However, if you make representative-assisted trades there is a fee of $25 per trade.
Option: Also commission-free, but there is a charge of $0.65 per contract. And similarly, there will be a $25 commission for any representative-assisted trade.
Mutual funds: Commission-free for online trades, with a $20 per transaction commission if representative-assisted.
Fixed income/bonds: There are no commissions or fees charged for trades of U.S. Treasury bills, notes and bonds, or new issues of corporate bonds, municipal bonds, government agency bonds or brokered certificates of deposit.
However, trading of secondary market corporate bonds, municipal bonds, government agency bonds and brokered CDs have the following fees:
Online – $10 per trade, plus $1 per bond over 10 bonds, up to a maximum of $250.
Representative-assisted – $30 per trade, plus $1 per bond over 10 bonds, up to a maximum of $270.
Self-Directed Investing Portfolios
SDI Portfolios come with a low percentage annual advisory fee of 0.35% of your account balance, paid monthly. There are no other fees involved in the management of your account.
J. P. Morgan Self-Directed Investing Sign-up Bonus
J.P. Morgan is currently offering a bonus of between $50 and $700 if you open an account with at least $5,000. The bonus is structured as follows:
$700 when you fund with $250,000 or more
$325 when you fund with $100,000-$249,999
$150 when you fund with $25,000-$99,999
$50 when you fund with $5,000-$24,999
(All accounts must be funded at these levels in the first 45 days and remain in the account for at least 90 days)
Disclosure: INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
How to Sign Up with J. P. Morgan Self-Directed Investing
To open a SDI account you must be at least 18 years old, have a valid Social Security number, and a U.S. home address. You’ll be asked to provide a valid driver’s license or state-issued ID for identity verification purposes.
You can open the account from YouInvest.com. There you can choose a Self-Directed Investing Trade or Self-Directed Investing Portfolios option, either as a taxable brokerage account or an IRA. If you choose to open a SDI Portfolios account, you’ll need to complete a questionnaire that will help determine your investment goals, time horizon, and risk tolerance.
If you are an existing Chase account holder, much of your application information will be transferred over from in-house records.
When completing the application, you’ll first be asked if you are an existing Chase customer. If you are, you can simply enter your username and password, and your application will be populated from information already on file with Chase.
If you are not an existing Chase customer, you’ll need to complete the online application. You’ll then need to manually supply the following information:
Your full name
Country or citizenship
Date of birth
Social Security number
The type of ID (driver’s license or state-issued ID), as well as the ID number, expiration date, and the issuing state
Your home address
Your email and phone number
Funding your account
You can fund your account either through an existing Chase account or from an external financial institution. If you already have a Chase account, you can transfer funds into your Self-Directed Investing Account by choosing Pay & transfer, then Transfer money.
If you are linking an external account, you can simply choose “Add new external account”, then enter the routing number and personal account number from your institution. You can set up either a one-time transfer or recurring transfers.
J. P. Morgan Self-Directed Investing Security
All investment accounts are protected against broker failure by the Securities Investor Protection Corporation (SIPC). Your account is covered for up to $500,000 in cash and securities, including up to $250,000 in cash.
J. P. Morgan Self-Directed Investing Mobile App
You can invest with SDI using the Chase Mobile App, which is available at The App Store for iOS devices, 11.0 and later. The app is compatible with iPhone, iPad, and iPod touch. Its also available at Google Play for Android devices, 6.0 and up.
You can use the mobile app to manage all your accounts with J.P. Morgan including your Self-Directed Investment accounts. That includes trading securities and funds and taking advantage of all the tools and research information available on the platform.
J. P. Morgan Customer Service
Customer service is available by phone Monday through Friday, from 8:00 am to 7:00 pm, Eastern time. However, you can place online trades anytime between 6:00 am and 2:00 am Eastern time.
FAQ
Do I need to be an existing Chase account holder to open a Self-Directed Investing account?
No. There is no requirement for you to be a current Chase account to participate in the service, nor is there a requirement for you to open a Chase bank or credit card account as a condition of your SDI account.
Can I open a Self-Directed Investing account in the name of my business?
No. SDI accounts are only available to individuals and joint personal account holders. The platform is not designed for business customers.
I like that Self-Directed Investing offers commission-free trades on stocks, options, and ETFs. But why do they charge such high fees for representative-assisted trades?
The practice of charging fees for trading with live assistance is common in the brokerage industry, even now that most brokers have eliminated commissions for online trades. Self-Directed Investing representative-assisted trade fees are consistent with those charged by other brokerage firms. A major reason brokerage firms are able to offer commission-free trades is because they don’t require assistance from broker employees. Fewer assisted trades means lower payroll costs for the brokerage firm, enabling them to charge no fees for online trades.
If I use the Portfolio Builder, what kind of investments can I hold?
The Portfolio Builder tool enables you to invest through ETFs and stocks. This includes both U.S. and international equities, as well as core fixed income and commodities. However, the tool does not allow mutual funds in the portfolio.
Open to non-Chase customers — Self-Directed Investing is available to both Chase and non-Chase customers and investors.
Commission-free trades — This applies to stocks, ETFs, and options (though like most brokers, there is a per contract fee with options).
Generous sign-up bonus — These range from $50 to $700.
Both self-directed investing or professionally managed — Ability to choose either self-directed investing through Self-Directed Investing Trade or a professionally managed option through SDI Portfolios – or you can use a combination of both.
Tools to help create and manage a portfolio — The Portfolio Builder tool helps create and manage your portfolio, even as a self-directed investor.
Investment options are a bit limited — The platform doesn’t allow you to invest in real estate investment trusts (REITs) or penny stocks (stocks that either aren’t listed on a major exchange and have a price of less than $5).
Limited customer service hours — J.P. Morgan’s customer service live support is limited to business days until 7:00 pm. This is substantially less than the 24/7 customer support available with most major competitors.
High Advisory fee — The advisory fee of 0.35% on SDI Portfolios is higher than the industry average of 0.25% for robo-advisors.
Alternatives to J. P. Morgan Self-Directed Investing
The investment brokerage field is a crowded one, and some of the alternatives you may want to consider include the following:
E*TRADE
E*Trade operates similarly to J.P. Morgan Self-Directed Investing in that it has both commission-free self-directed trading, as well as managed portfolio options. But the platform offers a more comprehensive suite of investment tools, and also a wider range of investment options. For example, you can also trade futures and FOREX.
Ally Invest
Ally Invest, with both self-directed investing and a managed portfolio option. And just as is the case with J.P. Morgan Self-Directed Investing, you can also take advantage of the banking services and high-yield savings accounts and CDs offered through Ally Bank. Much like E*TRADE, Ally Invest also offers more diverse investment options than J.P. Morgan Self-Directed Investing.
TD Ameritrade
Tied in with TD Bank, TD Ameritrade also enables you to invest where you bank. They similarly offer no commission trading on stocks, ETFs, and options. And like most brokerage firms, they also offer managed portfolio options. Once again, TD Ameritrade offers something that J.P. Morgan Self-Directed Investing doesn’t, and that’s commission-free mutual fund trades. In fact, they offer more than 4,000 no transaction fee mutual funds to choose from.
Is J.P. Morgan Self-Directed Investing for You?
J.P. Morgan Self-Directed Investment will work best for existing customers and clients of J.P. Morgan. If you already have a banking relationship and/or a credit card through the company, investing with them will be a natural choice.
If you’re not an existing J.P. Morgan customer client, or even if you are, you should be aware that this is strictly for self-directed investors. It doesn’t have quite as many investment tools and resources as other major brokerage platforms. For that reason, it’s best suited to self-directed investors who have their own investment resources and tools.
However, the platform was launched less than two years ago and is still evolving. With J.P. Morgan behind it, we can expect better things to come.
If you’re not a self-directed investor, you can still invest through Automated Investing. This is a robo-advisor, and provides all the benefits that come with low-cost, professional investment management. However, the annual advisory fee of 0.35% is higher than the industry standard fee of 0.25%. Those are the fee levels you can expect from popular competitors, like Betterment and Wealthfront.
But if you’re looking to combine investing with banking, there’s no better place to do it than with J.P. Morgan. As the largest bank in the U.S., operating in 36 states–and determined to enter the remaining 14–they offer something for everyone.
Bottom Line
J.P. Morgan Self-Directed Investing is a solid investment platform for self-directed investors who have access to a reliable source of investment tools and research. The platform may expand those tools and resources going forward, but they’re not quite there yet. In the meantime, they offer commission-free trades, as well as a managed portfolio option if you’re not quite ready for self-directed trading.
Disclosure: INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode: Get an inside look into strategies and pitfalls of the high-risk, high-reward world of day trading.
Hosts Sean Pyles and Andy Rosen discuss the high-stakes world of day trading and shed some light on your statistical chances of finding success. Then, Andy welcomes seasoned traders Sierra Smith and Michael Sincere to the podcast to share their perspectives. They pull back the curtain on Sierra’s typical trading morning, break down concepts like options trading and highlight the rollercoaster ride of market highs and lows.
They also discuss the profound role of social media in day trading, the importance of discipline and emotional control and the potential pitfalls and real challenges in day trading. Drawing from their personal experiences, they shed light on how they’ve learned to take profits quickly, prevent losses from spiraling and maintain a realistic perspective on potential returns.
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Episode transcript
Sean Pyles: There was a time back, oh, about 30 years ago when headlines were filled with stories about people using newfangled technology to trade stocks minute by minute from the comfort of their couches. Today, you can trade almost second by second, but that doesn’t mean it’s a good idea.
Sierra Smith: In the beginning it’s definitely not all sunshine and rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making. Especially when you’re doing day trading with options, it’s very volatile, so it’s very much high risk, high reward.
Sean Pyles: Welcome to NerdWallet’s Smart Money Podcast. I’m Sean Pyles.
Andy Rosen: And I’m Andy Newfangled Rosen.
Sean Pyles: Today we have episode two of our Nerdy Deep Dive into next level investing. And Andy, let’s just start out with the caution we mentioned last episode, which is that here on Smart Money, we still think the vast majority of people will have more success with very basic investing strategies, like using the buy-and-hold strategy, investing for the long-term, utilizing low cost, lower risk index funds, seeking out safe returns like high yield savings accounts.
Andy Rosen: You’ll get no arguing from me on that, Sean. But as we noted last time, some people do want to do more on the markets. Maybe they have some playing around money, maybe their risk tolerance is higher than the average bear, or bull. Maybe they’re just curious about all these terms that they hear on the nightly news. Does anyone watch the nightly news anymore?
Sean Pyles: Nope.
Andy Rosen: Yeah, and as we also noted, it’s good to be educated about the different ways investors use the stock market and other markets, because all of it has an impact on the overall economy, which affects everybody.
Sean Pyles: Right. Well, frankly, when I hear the phrase day trading, I just think the odds are really against people. There’s research showing that only about 1% of day traders consistently make money, and some kinds of day trading, like trading options, you can actually lose more money than you put up. If you don’t know what you’re doing or your expectations are not aligned with the reality of what you’re doing, you can get into a desperate situation pretty quickly.
Andy Rosen: It is absolutely true that people can get over their heads quickly, and there are a lot of people on social media that make day trading seem like it’s easier or more profitable than it actually is. Think of it this way, if you were losing a lot of money day trading, do you think you’d go on TikTok and brag about it? I doubt it, right?
Sean Pyles: Probably not.
Andy Rosen: Yeah. If people want to try this, they need to be aware of these percentages and aware of the risks and the time and effort that is involved. You really have to be watching moment to moment to see what’s happening. But the fact is that there are a lot of day traders out there and they do help move markets, so let’s hear from a couple of them to try to understand what they do and how it really works.
Sean Pyles: Let’s do it. But before we get to that, a reminder from the lovely folks on the NerdWallet legal team, we Nerds are not financial or investment advisors, we will not tell you what to do with your money. Everything in this episode and this series is to provide you, our dear listener, with the knowledge to make informed decisions with your own money.
And listener, we want to hear what you think, too. To share your thoughts around next-level investing with us, leave us a voicemail or text the Nerd Hotline at 901-730-6373. That’s 901-730-NERD, or email a voice memo to [email protected]. Andy, who are we hearing from today?
Andy Rosen: We’re hearing from two day traders, one former, one current. Sierra Smith is a trader and social media creator who runs a Discord server where she and other traders talk about strategy, trading concepts, etcetera. She’s based in Houston, and you can find her on TikTok or YouTube as well.
Michael Sincere is an author and speaker about investing topics. Among his books is “Understanding Options” and “Start Day Trading Now.” And he’s also a financial columnist for MarketWatch. He’s based in Miami.
Sean Pyles: Hey, Andy, before we go any further, let’s take a second to talk about what a Discord server is and what it means to run one. A lot of folks might not be familiar with this. You said Sierra does this, right?
Andy Rosen: Right. Without getting into too much detail, Discord is basically a chat service organized around a specific topic or interest group. And they’re particularly popular among video gamers, that’s where the service rose to popularity, but they’ve developed a big audience in the online investing world. Content creators like Sierra will often use Discord servers to connect with their audiences. If you haven’t used Discord, think of it as something like a mixture between Slack or Microsoft Teams with a little bit of Reddit mixed in.
Sean Pyles: OK, cool.
Andy Rosen: Sierra, Michael, welcome to Smart Money.
Sierra Smith: Thank you for having me.
Michael Sincere: Thanks for having me, too.
Andy Rosen: The first thing I want to know is, I guess I’ll start with Sierra, did you do any day trading today?
Sierra Smith: I actually did do some day trading today.
Andy Rosen: Tell me, just as an easy example to pull out of your head, what did you do? Just talk to me about what your morning went like.
Sierra Smith: This morning specifically I did live trading with my Discord server. We got on around 8:15, I marked up three different stocks for them, so that way they could have a variety to choose from if they chose to take some trades. I personally took Apple today, I traded Apple. I took calls, which essentially means that I believe the stock is going to go up, for those who don’t understand options terminology or anything.
Yeah, that’s what my morning was today, day trading. And then afterwards we just did some education. We did some trade recap for some people who didn’t win on their trade, we went over why they didn’t. Yeah, that was pretty much my early morning today.
Andy Rosen: And can you tell me what you saw in Apple this morning, in layman’s terms, that made you feel confident about making those short-term trades?
Sierra Smith: I think Apple was the price in the pre-market. There’s pre-market and post-market, and there’s actual market hours. Pre-market with options you cannot trade. But in the pre-market it was sitting within this demand zone, I believe. And so if it’s within a demand zone, that essentially means that the stock most likely will go up from there.
I just facilitate, I’m going to take Apple calls today, because it’s within that zone, which is the whole chart analysis that we did before the market opened. And so that way when the market actually opened, we were able to take that trade based off of that prior analysis.
Andy Rosen: And Michael, I know you’re not really doing day trading anymore. Tell me what your daily thinking about your portfolio looks like.
Michael Sincere: Right. What Sierra was doing was something I did do in the past, mostly when there was a volatile market. And I would jump on some of the hot stocks and ride it higher. And I stopped it because it’s wonderful when you’re on the right side, but if you’re not, it can turn around really quickly.
To answer your specific question, I switched from day trading to a more traditional buy index funds. And I sell covered calls, which is also an option strategy, but to me it’s a lot less risky than day trading.
Andy Rosen: Just for the people out there: When you sell a covered call, basically what you’re doing, if I’m understanding correctly, is you are selling an option for someone else to buy a stock that you already own. So if your trade doesn’t work out, you at least have the stock to back it up. You’re not going to have to buy a stock at a higher price than you might want to pay for it in order to sell it. Is that accurate?
Michael Sincere: It is, and I’ll give you an example. Let’s say I bought Apple, and then what I would do is I would rent out those shares to Sierra, who’s buying calls. I’m selling those calls to her, she’s buying them. I wouldn’t make as much money on it, but I do get an immediate income. And so what I do is I sell them to the speculators, and I’m like the landlord. I get my income and I just want my nice income and I don’t have to go through the stress of watching it all day long, every minute, can’t even go to the bathroom. That lifestyle I decided to walk away from. But by selling the covered calls, basically Sierra or another speculator, they basically own the rights to it, and they can sell it from me at any time. So I just wait a month or whatever timeline that I decide to sell those calls on.
Andy Rosen: Got it. Maybe you folks have met before, even without knowing.
Sierra Smith: Probably.
Michael Sincere: Absolutely. I hope you enjoyed those calls I made and bought today.
Sierra Smith: I did.
Michael Sincere: Thanks.
Andy Rosen: Let’s go back and hear a little bit about each of you with your origin stories. Maybe start with Sierra. How old were you when you started trading? What made you start? Tell me a little bit about how you got into it.
Sierra Smith: I started trading when I was 18 years old. After I had graduated high school, I had a friend, and he had posted on social media, he had bought his dream car at 18. And I’m like, what? We just graduated high school, so it doesn’t make sense for you to be buying your dream car at that age, or so I thought. And so I asked him, I was like, “What do you do? How did you buy that car?” And he told me that he traded options. And I’m like, hmm. I’ve never heard about options trading before, all I knew was I can buy a stock if I so wanted to.
And so he taught me how to trade options. And then from there I just started trading. I spent a lot of time looking at charts. I’ve just fallen in love with trading. I’ve just been trading, I would say I trade at least four out of five days of the week, even now.
And it’s just because now I think my shift with trading has focused from not trying to trade to survive and make a living and provide for myself, but now it’s just trading just to make some income. And just because I love trading, I really do love what I do. I’m really passionate about it. Because I think when people hear trading, they have a whole negative stigma around it. Or when it comes to financial stuff in general, people get leery. No matter what it is, whether it’s trading or investing or whether it’s buying something off the street, people get a little leery when it comes to putting their money in certain places. I just think being able to de-stigmatize trading as a whole is something that I love to be able to do.
Andy Rosen: You talk about how you love it. What makes you love it? And do you love it every day? There can’t be all sunshine and rainbows, can it?
Sierra Smith: In the beginning, it’s definitely not all sunshine or rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making. Especially when you’re doing day trading with options, it’s very volatile, especially the way that I trade. So it’s very much high risk, high reward.
Obviously, the days that I win, I’m having a great day. I love it then. But obviously those losing days are really hard. After you get more comfortable trading, you realize how to take losses with a grain of salt. Those larger losses, those hurt. But when it comes to options trading, you just have to build up a sort of mental fortitude, especially if you trade the way that I do. While I do agree, there are definitely less riskier ways to trade, that’s just how I personally do it. Because like I said, I’m 20 and I like to make risks. It works for me.
Andy Rosen: Got it. I’m 39 and I use a robo-advisor.
Michael, I know you’ve done a lot of research and writing about various aspects of navigating the financial world, but you’ve done some specific research into the world of day trading. I was wondering if you could give a really quick Cliff’s Notes about how this became a normal part of the financial world. It wasn’t too long ago that regular people could not just log onto their computer and trade stocks on their own. You would’ve had to go through a lot more hoops than you can do now. Can you talk just a little bit about the history and maybe you can segue into how you became acquainted with it?
Michael Sincere: Well, the history goes back to the ’90s, when I was beginning as well. All of a sudden I discovered trading. And I think it started with Netscape, which I think went up an unbelievable amount of money in one day because of something called the internet, which was suddenly discovered. Before, if you were day trading or any kind of trading, it would cost you as much as $100 per trade. And once the internet came and these companies started switching to online trading, it went from $100 per trade to maybe $20 a trade. And as you know, now it’s pretty much free. But that’s when I got involved.
And in the ’90s, the day trading was unbelievable. It seemed like any stock you bought related to internet, you could make $20,000, $30,000 a day. And that’s when it really got really popular. Unfortunately, it all came to a screeching halt when the market, I think it was around 2000, when it all crashed. And all the day traders started losing money. All their money.
I was on these websites and I saw them just panicked as they … I’m trying to think of some of the stocks they bought, but many blew up, like Pets.com and all these others. And people got sick of day trading for many years. The majority did.
And then now it’s made a resurgence again, or at least it did over the last few years. And so Sierra, what she’s doing is it’s, as she said, high risk, high reward. It’s intense. You have to sit, be in front of the computer all the time. And day trading options is even more speculative. And I wrote books on options and on day trading. But when you combine day trading with options, the way options work, they can switch in a minute. You could be up and then the next minute you could be down. I have a lot of respect for anyone who can book a profit.
For me, I was trying all types of trading and decided to write books about it. Because I made so many mistakes, lost so much money at first, and so I was trying to help other people. And that’s when I both wrote books on day trading and options. I think I wrote about eight books on both.
Andy Rosen: I did want to ask, both of you in different ways have made part of your living out of talking about trading, and talking about the financial world with people. And I think this is true of a lot of people who get into this world. There is this content aspect to it. Tell me why you think the public-facing aspect of it seems to be important to a lot of traders, from the influencers to the authors.
Sierra Smith: I know from my experience, I can say I recently started utilizing social media to talk about trading. And so I had made a TikTok about it online, and it blew up and it went viral. And so many people were like, “Oh, I’m super interested in trading, and I would love to learn.” And for the first time in two years I was like, you know what? Maybe I will start teaching. Because I’ve never wanted to teach people about trading. I just would do it by myself and go on about my day. But I think when it comes to the social media aspect of trading, I think people have to see that it works for other people. They have to see how it works, why it works, in order to want to get into it. Because everybody knows you can buy and sell stocks, but no one really knows how profitable it could be or what that looks like on a day-to-day basis. I think the social media projection of it really helps bring people into the trading industry, if you want to call it that.
Sean Pyles: I saw on one of your — I think it was a TikTok video that you made — I saw you talking about how there’s a lot of people on social media that will tell you, “Oh, I did these three trades that I made this amount of money,” and you were warning people it’s not that simple.
Sierra Smith: Yeah.
Sean Pyles: What do you think are some of the pitfalls of social media based investing?
Sierra Smith: I think one of the pitfalls of it is everybody wants to make trading seem like it’s perfect. And then people always want to post what they’ve made in their profits, but they won’t talk about their losses or they won’t talk about what they put in.
I know as far as options goes, it’s a lot about percentage. That’s how I see it. For example, if I tell you guys that I’ve made $10,000 in a day, it’s not because I turned $10 into $10,000. It’s usually because, OK, I made a put at 40, it made 25% on that trade.
I think the pitfall, the major pitfall when it comes to trading and social media, is that people don’t advertise the entirety of what it is. And a lot of people end up getting into trading thinking that they’re going to turn $50 into $5,000 in two days, and that’s just not realistic.
Andy Rosen: Michael, obviously you’re maybe not as active on social, but you’ve done quite a lot of content around these kinds of activities. What’s your perspective on it?
Michael Sincere: Well, first of all, by writing these books I was able to speak to some of the best traders and investors in the world, like Peter Lynch, Mark D. Cook, who passed away. But Mark D. Cook was one of the top option traders in the world, and was successful for many, many years. I used to interview him all the time and he became a friend, so I learned a lot from him. And it took him five years to become successful. It was very difficult those first five years, and he wanted to give up many times trading options. But then he found his system.
And what I learned from him, and my own experience, is it’s really the emotion that gets everybody. It’s really the discipline and emotion. Everyone talks about the discipline, but they don’t really know what it means until they start trading. And what I mean is you’re in a losing trade and you’re ready to lose $10,000. And you have to figure out very quickly whether you close the trade, whether you add more to it, whether you hold, and these are lightning-fast decisions that really hurt a lot of people.
I’m sure Sierra’s gone through this many times. I’ve found from my experience, it’s very difficult. Beginners have high expectations about how easy it is to make money, as Sierra said. But it does take a long time to find your own style. And trading’s not for everybody, too.
And some of the pitfalls I’ve found is, one, a lot of people turn from trading to gambling. It’s very easy to do. You think you’re trading, you’re following everything, but you’re betting way too much money on a trade. Which means, yes, you can make $100,000, but you also could lose that exact same amount if you’re not careful. Which is why I tell people the number one rule is to trade small, especially when you’re beginning. Do not try to make $100,000 in one day, try to make a few hundred. If you can do that consistently over a long period of time, then you may have a shot at it. But if you come in there trying to make big, big bucks, nine out of 10 are going to blow up their account, in my opinion.
Sierra Smith: Yeah, I’m definitely seeing more people fail than succeed when it comes to starting out in trading, and that’s just because so many people think trading is going to be so easy. A lot of people don’t exercise proper risk management, which is something that anybody that’s been trading for a while will tell you to exercise.
Or the way somebody with a larger account size trades is entirely different in the way somebody with a smaller account size trades. For me, I have a larger account size, so I can put tens of thousands of dollars into a trade and be OK with it with the way that I trade. But the strategy that I use may not work for somebody who only has $500 in their account. And so I think a lot of people just assume that you can just make all this money overnight, and they end up just getting so discouraged beyond trading. Which sucks, because trading for me obviously has changed my life, and I think there’s so many good and positives to it, but I just don’t think people are really fully educated on what trading really is.
Andy Rosen: I do want to get back to some things that might help those beginner level people who just know this term and want to get a sense of it. Michael, if you would be willing, could you just tell us a little bit more about how you moved off of day trading? You talked a little bit just about the lifestyle and why it didn’t work for you, but just a little more detail on how your views evolved would be awesome.
Michael Sincere: I kept coming back to the fact that the strategy that worked again and again — and I used to have long conversations with John Bogle as well, who was the father of indexing — and I found out that over and over I was making more money on a longer-term basis just by buying and holding these index funds. At the same time, I was trying to make fast money using the strategies Sierra’s using, like momentum trading. And I actually did do option trading with momentum. I found it extremely stressful. I found out I had to devote entire days to it. I tried to get out by noon. That was my goal each day, get in at the open, ride it and then get out. And yes, on the good days, I’d make pretty good money. I’d make $10,000 on good days. Once I made $30,000 and I was riding high. Three days later, I believe, I lost it all.
I found out after about a year of this, it was not for me. You have to know your own personality. And I found, for my personality, I couldn’t take the stress of it every day. And so I pretty much stopped day trading, and I wrote books on helping people manage the risk part of it. Anyone can learn about the technical aspects of it, like the charting and the indicators, but it’s the emotions that are the difficult part to manage. That’s what really ruins most people. I emotionally did not have what it takes to be a professional day trader, especially a momentum trader. And I saw that it was easy to blow up my account. And some days I’d blow up that day or that week, and I got out of it.
Andy Rosen: Sierra, it must also take nerves of steel to stop after a couple minutes. If you’re doing well, it’s probably tempting to say, oh, I could get more. Right? It seems like one of the things you’re describing is managing that and knowing when to stop. I would love to hear either one of you talk about when to stop. When it’s time to stop, whether you’re having a good day or a bad day. When it’s prudent to take a deep breath.
Sierra Smith: One thing I always tell my students is that when it comes to day trading, green is green. It doesn’t matter if you made $500 or $5. Because I promise if you saw $5 on the ground, you would pick it up. I think I have lost so much money in the markets just holding out on trades and just like, hey, you know what? It’s going up. I could hold this out for five more minutes, 10 more minutes, and then it ends up reversing back down against my trend. And the minute that I see I’m in profit enough that I’m happy with, I will end my trade. And I think the reason why I trade like that, again, is because I’m at a point where it’s not like I’m trading trying to compound my account and secure my lifestyle.
That’s all said and done now. I feel like now my trade’s very relaxed. It’s just get in, get out, make something for today, and then go on about my day. That’s why I’m OK with just being in trades for a few minutes. Sometimes I will exit a trade and then the stock will run three more dollars and I’m like, man, I could have made so much money. But as long as I left with something, I’m good.
Andy Rosen: And what about on a bad day? There’s got to be a temptation to chase a loss to try to get it back. How do you manage that?
Sierra Smith: I have trading rules, actually. I have personal rules for me when it comes to trading. If I take a loss, I’m just going to be done for the day. Honestly, I could have a risk or a probability of being able to make that back, but I would rather take one loss than take two losses or three losses trying to keep revenge trading and get that back. Lost a lot of money doing that also. I’ll no longer be doing that when it comes to trading. I just think when you take a loss, you have to make sure that you don’t let your losses lose that battle, if that makes sense. Obviously you have to have a stop loss and proper risk management, so that way it’s not like when you do lose, you’re losing your entire account size every single time.
Andy Rosen: Tell me, if there are listeners out there who are thinking, this sounds fun, this is something I might be interested in, I would like to try it out, where do you recommend people start? What’s the first step someone should take? Thinking of someone who might not even have a brokerage account and just wants to figure out if day trading is something they could ever do.
Sierra Smith: I think people who want to start, should start with not by learning anything about brokerage accounts or charting or anything, I think they just need to learn what trading is and what trading is not. Because I know a lot of people want to start when they hear how much money that people have made, but they have to understand what trading is. What trading really is and what it isn’t.
And then after that, I say people need to start with just looking at charts and just seeing if they can find some that make sense to them. And the biggest thing that helped me learn how to trade was having somebody who walked through it with me. Because you have to know what type of learner you are. Some people can read books on options training and learn. Some people watch videos, some people need one-on-ones with people. So just figuring out how you learn and using that and applying that to the trading world.
Andy Rosen: Michael, what do you think?
Michael Sincere: I think that people should, again, as I said, start small. I think if they know nothing about the market at all, they should start with opening up an account, starting with index funds or mutual funds. Start at that level. They really need to understand the stock market first. If you want to become a day trader of stocks, do a small amount, open up. But you have to start with the brokerage account, you have to learn the different aspects. And that means learning about the indicators and learning there’s a lot to the market that a lot of people don’t know.
Now, eventually, if you want to trade options, you should first start by learning the different aspects of options. There are great books on trading and on investing with options. But again, there’s no rush. If you’re coming in trying to make big money fast, that may not turn out so well. Basically, become a student of the market.
Andy Rosen: Both of you. Thank you so much for coming onto the show and telling us about your perspectives. Thank you so much.
Michael Sincere: Thank you.
Sierra Smith: You are so welcome. Thanks for having me.
Sean Pyles: Hey, Andy, I’ve got to tell you, I am pretty torn after hearing that conversation. Sierra seems to be living a super cool and successful life at such a young age. And there’s part of me that wants that, but there’s another much more rational part of me that knows that it’s just not realistic.
You hear about all the money she’s made, and it can be easy to forget that the vast majority of day traders lose money. I really view Sierra’s narrative as a cautionary tale, maybe, for her followers online more than for Sierra herself, because people might view her TikToks or courses, or those of another day trader, and think that this is a secret path to instant wealth, but it’s really not. Again, in all likelihood, you’re going to lose money if you do what Sierra does.
Andy Rosen: Sean, I think I have to agree. Obviously, Sierra does seem to be living a super cool life. She seems to be having a really good time, and that’s her life. And a lot of people have tried this and had very different results. And so, yeah, you might wind up like her and you might envy her, but on the other hand, you could wind up like the majority of traders and not get the kind of results you’re looking for, or wind up losing something that’s important to you.
You may be able to improve your chances by doing very scrupulous research, paying really close attention to your investments and how they’re performing moment to moment. But on the other hand, your research may lead you, as it seems to have done Sean, to the conclusion that this investing style isn’t for you. Maybe you don’t even have the time for it. And many people spend hours doing this every day and still lose money. As we said before, those are not the people you tend to see promoting their trade as much as the winners do.
Sean Pyles: No, and that’s why at the end of the day I know that I’m much more of a Michael than a Sierra. I love to do some research and have a solid understanding of what I’m going to be doing with my investment strategy. Plus, like Michael, I do not have the emotional fortitude to weather the big ups and downs that Sierra experiences on a daily or hourly basis.
All right, well Andy, how about a preview of what’s coming up in episode three of this series? Are we going to Vegas?
Andy Rosen: Well, some people would say we are, because we’re talking about options trading, short selling, derivatives, and contracts, all of which can have huge upsides and huge downsides. But they’re also very important in the market, so it’s worth hearing how they work, who might want to include them as part of a diversified portfolio, and how to know when it’s time to leave it to the pros.
Sam Taube: The risk and reward tends to be a lot higher than with just stock ownership. Because generally, with derivatives trading, you’re either going to get a big payout, double your money or something like that, or you’re going to lose everything you invested in a particular contract.
Sean Pyles: For now, that is all we have for this episode. If you have a money question of your own about investing or anything else, turn to the Nerds and call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you’re getting this podcast.
Andy Rosen: This episode was produced by Tess Vigeland and me, Andy Rosen. Sean and Liz Weston helped with editing. Chris Davis helped with the fact-checking. Kaely Monahan mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help.
Sean Pyles: Here’s our brief disclaimer one last time. We are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances. And with that said, until next time, turn to the Nerds.
“The first rule of investing is don’t lose money; the second rule is don’t forget rule number one.” — Warren Buffett
At the end of March, I asked you what topics you’d like to see covered during Financial Literacy Month. I received many great suggestions, and will continue to fulfill requests not just in April, but for months to come. One comment especially caught my eye. Kenneth F. LaVoie III wrote:
Never again will I be in a position to lose 50% of my money. There must be a way to see the Big Picture and lighten up on areas that are over-valued, but still enjoy an average return at least approaching that of the market as a whole…I’d love to hear some simple strategies that require a little thought, and don’t just focus on keeping a lot of money in cash and short term bonds.
It sounds to me as if Ken is asking about defensive investing, which is actually something I’ve been thinking about a lot lately. When I was younger, my investments were mostly speculative. They were gambles. I wanted to earn huge returns — and I wanted them today. Even two years ago, I was investing in Countrywide and The Sharper Image.
But as I’ve built wealth and become better educated about money, I’ve become a defensive investor. I’ve become less interested in quick gains. Last year’s market collapse was another shock to the system, not just for me but for many others. We’ve realized that our risk tolerance isn’t as high as we once thought it was.
Risk tolerance is the degree to which you, as an investor, are willing to accept uncertainty — and possible loss — in the investments that you make. If you have a high risk tolerance, you’re willing to accept large fluctuations in your investment returns in exchange for the possibility of large gains. If you have a low risk tolerance, you’d rather your return was constant.
More and more, I’ve become a fan of index funds — mutual funds built to track the broad movements of the stock market. They don’t outperform the market, but they don’t underperform it, either. To learn more about index funds, I’ve begun to attend the quarterly meetings of the local Diehards group.
The Diehards are fans of John Bogle, who founded The Vanguard Group, and who is considered the father of index funds. The Diehards mostly hang out in an internet discussion forum, but from time-to-time they meet in groups around the country to discuss investing.
At the last meeting, we took turns describing our current asset allocations and what we’ve done to respond to the faltering economy. It was no surprise that most people hadn’t done much to change their investing strategies. What was surprising is that although everyone was a fan of John Bogle, I was the only one whose portfolio was composed primarily of index funds.
Each member of the Portland Diehards group has his own approach to investing. Many focus on real estate. But one man’s choice especially appealed to me. Craig told the group that he has based his asset allocation on Harry Browne‘s “Permanent Portfolio”.
Asset allocation is the division of money among different types of investments. The classic example is the basic 60/40 split: 60% invested in stocks and 40% in bonds. “Asset allocation” is just a fancy way of saying “the things in which I’ve invested”.
After listening to Craig’s explanation of the Permanent Portfolio, I picked up Harry Browne’s little book, Fail-Safe Investing. Browne divides investment money into two categories:
Money you cannot afford to lose.
Money you can afford to lose.
For the former, Browne recommends investing in a “permanent portfolio” that provides three key features: safety, stability, and simplicity. He argues that your permanent portfolio should protect you against all economic futures while also providing steady performance. It should also be easy to implement. (For the money you can afford to lose, Browne suggests a “variable portfolio”, with which you can do anything you want — even invest in Beanie Babies!)
There are many ways to approach safe, steady investing, but Brown has some specific recommendations for his own Permanent Portfolio:
25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as VFINX or FSKMX.
25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).
25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means a money-market fund. (Note that our current recession is abnormal because money actually isn’t tight — interest rates are very low.)
25% in precious metals (gold, specifically) in order to provide protection during periods of inflation. Browne recommends gold bullion coins.
Because this asset allocation is diversified, the entire portfolio performs well under most circumstances. Browne writes:
The portfolio’s safety is assured by the contrasting qualities of the four investments — which ensure that any event that damages one investment should be good for one or more of the others. And no investment, even at its worst, can devastate the portfolio — no matter what surprises lurk around the corner — because no investment has more than 25% of your capital.
To use the Permanent Portfolio, you simply divide your capital into four equal chunks, one for each asset class. Once each year, you rebalance the portfolio. If any part of the portfolio has dropped to less than 15% or grown to over 35% of the total, then you reset all four segments to 25%. That’s it. That’s all the work involved.
Browne’s Permanent Portfolio is unlike anything I’ve ever considered before, but I have to admit: I like it. A lot. It has a distinct “get rich slowly” feel to it. That is, this portfolio is not designed to earn lots of money; it’s designed to not lose money.
What’s more, the Permanent Portfolio is based on the smart investment behaviors we’ve explored before. It’s a passive strategy built on diversification. It doesn’t use market timing. It’s a defensive investment strategy that also happens to produce a decent return.
Diversification is often mentioned with asset allocation, and for good reason. Diversification is the process of investing in many different things, of not putting all of your eggs in one basket. Studies have shown repeatedly that by investing in different types of assets that aren’t correlated (i.e. do not move the same way at the same time), investors can reduce risk while maintaining (and sometimes increasing) return. This is the power of diversification.
All of this is a long way of saying that, like Kenneth F. LaVoie III, I too am interested in reducing my risk while maintaining a decent return. I understand that, in general, risk and return are intertwined. If you want maximum possible returns, you must accept great risk. If you want no risk, you will receive meager returns. But as William Bernstein demonstrates in The Four Pillars of Investing [my review], diversification can lower risk while increasing return.
To read more about the Permanent Portfolio, check out the following articles:
I should also point out that there’s actually a mutual fund built around the concept of the Permanent Portfolio. PRPFX has an impressive record, though one based on less than a decade of data.
Note: Just because I am giving serious consideration to the Permanent Portfolio does not mean that you should do the same. Please base your investment decisions on your personal goals and psychology, not on my personal goals and psychology.
At any given time, there are numerous places and ways to invest your money, ranging from the stock market to real estate. But how and where you invest your money also brings up numerous potential risks and potential outcomes — for that reason, it can be difficult to decide what to do.
And while investors are right to wonder what investments make sense given the current economic and political climates, they may be surprised to hear that other, longer-term factors are just as important. As such, you may find it useful to learn the behavior of the available investment types, and then compare those patterns to whatever it is that you’re trying to accomplish, and along what timeline.
Learning About Investment Options
If you’re wondering “where should I invest my money right now?”There are several different potential answers and investment opportunities out there. But before you do anything, you’ll need to make some key decisions.
The first is to make a decision by investment type, which involves deciding to invest in certain asset classes or asset types. Your portfolio mix will be your asset allocation, which is covered below.
Stocks, bonds, cash, and money market funds, and real estate are just a few of the asset classes available to investors. Generally, the first order of business is to determine which is most appropriate for the financial goals an investor has. In order to determine this, it’s important to understand how each investment type earns a return.
Where to Invest Money
As noted, there are many different assets that investors can utilize or add to their portfolio. Here’s a rundown.
Stocks
A stock represents a share of ownership in a company. When an investor buys a share in a company, they own a small proportion of that company. Shareholders may even receive voting rights. This is why stocks are sometimes referred to as equities; investors now own equity in that company.
A stock can earn money in two ways. The first way is through the value of shares appreciating over time; this is called capital appreciation. The second is through periodic cash payments made to shareholders, called dividends.
Stock prices can be influenced by both internal and external factors, such as a new product launch or broader national or global events like a political event or natural disaster. Because the nature of business is highly unpredictable, stock prices can be volatile.
Bonds
A bond, on the other hand, is an investment in the debt of a company or government. The bondholder earns a rate of return by collecting a rate of interest on that debt for a predetermined amount of time, such as 10 or 20 years. Because the terms are stated upon purchase, bond values generally tend to be less volatile than stocks, but have more modest returns. That said, bonds are not completely without risk, and it is possible for bonds to lose value.
When interest rates are low, overall, bonds will likely pay out a lower rate of interest. Interest rates can change, and quickly, sometimes, which is something investors may want to take into account.
Typically, stocks are considered to have a higher potential for returns over time, but that comes with the price of volatility — the possibility of an investment losing value, especially in the short-term. Bonds are often considered a safer, more stable investment that may be more appropriate for investors who aren’t as comfortable with the volatility of the stock market.
A big part of deciding where to invest has to do with determining your relative comfort level with each of the different asset classes.
Mutual Funds
Investing directly in stocks isn’t the only option available to investors. Mutual funds present another way to invest in the stock market. Think of funds as baskets that hold an assortment of some other investment type, such as those mentioned above — stocks, bonds, and real estate holdings. Funds provide investors an easy way to access diversified exposure to many investments at once, but they are not an asset class in and of themselves.
Investment funds can be an affordable and quick way to get (and stay) invested, which makes them popular with both new and seasoned investors. But even if you decide to use funds as the device for which you invest in different markets, the first order of business is to understand the fund’s underlying asset class.
For example, someone who purchases a mutual fund that holds 500 stocks, is invested in those 500 stocks — and very much invested in the stock market. If you buy a mutual fund comprising 1,000 bond holdings, then you are invested in those bonds. If you buy a fund with real estate holdings, well, you get the idea.
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Options
Options are a form of derivative, and are “higher-level” investments than, say, stocks or bonds. Options can be difficult to understand, but fairly easy to trade — you’d likely want to discuss options trading or investing with a financial professional before you get into it.
That said, investors can invest their money in various forms of options, but they’ll need to keep an eye on their portfolios. Options trading is an active form of investing, as there are strike prices and dates that they’ll need to be aware of.
Exchange-Traded Funds (ETFs)
Exchange-traded funds, or ETFs, are very similar to mutual funds in that they’re effectively a basket of different investments, all compiled into one security. There are tons of different types of ETFs, encompassing all sorts of different market indexes, sectors, and asset classes. Odds are, if you’re looking for a specific type of ETF, there’s likely one out there that fits the bill — or that comes close to it.
Retirement Plans
A retirement plan or account is another place that investors can put their money to work. There are various types of retirement plans — the list includes individual retirement accounts (IRAs), 401(k) plans, and the Roth variations of each. Not all investors may have access to each type, so, see what’s available to you, and which type of plan best fits your investing strategy.
Index Funds
As discussed, index funds offer yet another investment vehicle. These are investment funds that track an index, which is usually a specific part of the broader market. For example, there are index funds that track the S&P 500, or there are index funds that track the tech sector.
Investing in an index fund allows investors to gain exposure to their preferred market segment, and there are numerous options out there, too.
Real Estate
Real estate investing can include physical property — houses, commercial buildings, etc. — or, it comprises purchasing certain real estate-oriented investment vehicles. While many investors may not have the capital laying around to buy a house for investing purposes, they can buy real estate stocks, or even look at REITs, or real estate investment trusts, to get real estate exposure into their portfolios.
Certificates of Deposit (CDs)
Certificates of deposit, often called CDs, should also be on investors’ radar. CDs are somewhat like savings accounts, in which investors “lock up” their funds for a predetermined period of time in exchange for interest rate payments. Functionally, they’re similar to bonds, but there can be fees if you need to pull your money out of a CD before it matures.
Options for Cash
In some instances, it may make the most sense to keep the money for a particular goal in cash. It is helpful to understand what options are available for cash savings.
Savings accounts at a traditional bank or credit union: This is likely the most familiar option. Traditional and commercial banks remain popular for their large geographical footprint. Note that many traditional banks tend to pay a relatively low rate of interest on any cash holdings.
Online-only checking and savings accounts: A newer option for bankers, online-only banks and banking platforms may offer a slightly higher yield than a savings account at a commercial bank. Additionally, many do not require minimums or charge monthly maintenance or account fees.
Money market funds: Often found in brokerage accounts, a money market fund is a fund that holds cash and or other “very liquid investments,” like short-term government securities.
Certificate of deposit (CD): As discussed previously, certificate of deposit is a savings account that holds money for a fixed amount of time, like one year or three years. A fixed rate of return is paid out during that period. Generally, there is a penalty to cash out a CD prior to expiration.
When considering cash as an asset class, consider the risk and reward tradeoff, just as one would for any other investment type. Although cash might not be risky when considered in terms of volatility, it does not come without risk. Cash carries the risk of losing value over the long-term due to the effects of inflation, or prices rising over time.
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Beginner-Friendly Places to Invest
If you’re a beginner investor looking for places to put your money, it may be beneficial to revisit some basic investing rules or guidelines. For instance, you’ll likely want to build an emergency savings fund before focusing on your stock portfolio.
But assuming you’re ready to put your money in the market or otherwise start building your investment portfolio, many beginners begin with some basic investment funds. ETFs are a popular choice, as are mutual funds — but note that there are some differences to be aware of.
If you’re not sure where to turn or what to do, consider speaking with a financial professional for advice.
Which Investments Provide the Highest Returns?
You’ve probably heard a certain phrase before: The higher the risk, the higher the reward. That largely holds true in the financial space, although not in every instance. It’s all to say that riskier investments tend to provide higher returns.
Assets like stocks are probably, by and large, going to provide higher or better returns than, say, bonds. Trading options can likewise be more profitable than buying and holding stocks, too. But there are significant risks involved in any strategy, and those risks can be magnified by the specific investments involved.
Again, if you’re looking for the highest possible return, it may be best to consult with a financial professional for guidance, or to give some thought to how each type of investment fits with your overall strategy.
Creating a Goals-Based Strategy
Contrary to how many new investors are encouraged to think about investing, it may not make sense to try and pick “hot” stocks right out of the gates.
Instead, take a step back and consider the bigger picture view, and ask whether stocks are even appropriate given your goals and investing timeline. This decision on which combination of asset classes to be invested in, and in what proportions, is called asset allocation.
To determine your asset allocation, start by thinking of each “bucket” or “pot” of money independently. For example, maybe someone has $1,000 set aside for retirement and another $1,000 that they’d like to use as a down payment for a home. Think about this intuitively; these are very different goals with different timelines and therefore, may require different investing strategies.
Next, consider the financial goals, risk tolerance, and investment time horizon for each bucket. This can sound pretty boring especially if you’ve been conditioned to believe that you should invest in whatever is currently the talk of the town.
Risk vs Reward
The asset allocation decision really boils down to an examination of an investment’s risk and reward characteristics in order to determine whether it’ll work on a personal level. Here’s what’s so important to understand: with investing, risk and reward are two sides of the same coin. Investors cannot have one without the other. For more reward potential, an investor will have to take more risk. There is no such thing as an investment that produces returns with no risk.
Let’s consider, again, the two hypothetical investment goals from above: $1,000 for a down payment and $1,000 for retirement. How do goals lead one down the path of where to invest?
First, the $1,000 for a down payment: If the money is designated for use in the next few years, the risk of losing any money in a volatile investment may outweigh the potential to earn investment returns. Therefore, it might be best to keep this money in a lower-risk investment or cash equivalent.
Next, the $1,000 for retirement. Many retirement investors have the goal of reasonable growth over the long-term. Because of this long time horizon, there should be enough time to grow beyond spates of short-term volatility. Therefore, it may be suitable to create a portfolio that is primarily invested in the stock market or a combination of stocks and bonds.
Retirement investors close to retiring may opt to consider some exposure to bonds for both diversification purposes and to lower the overall volatility of the portfolio. Ultimately, a person’s comfort level with the stock market will determine their specific stock and bond allocations. And it’s worth noting that an investing strategy isn’t stagnant. As a person ages, their goals and investing strategy will likely need to evolve, too.
Opening the Right Account
Here’s another way to answer the question, “where should I invest my money?” By doing so, in an appropriate account type, at a brokerage bank or on an investing platform.
Just as it makes sense to keep cash in a bank account, the same must be done with investments. But with investments, opening the right account can be a bit trickier.
It is not uncommon to hear someone refer to a 401(k) or a Roth IRA as if one of those is, in itself, an investment. But retirement accounts are not investments — they are accounts. Granted, they can hold investments, but they are still accounts.
Money is contributed to any investment account in cash, and then those proceeds are used to purchase investments, like stocks, mutual funds, and ETFs. (In a plan sponsored by a workplace plan, like a 401(k), the investing might happen automatically, hence the confusion about it being an investment itself.)
It is also possible to invest in an account that is not designated for retirement. At a brokerage firm, these are often simply referred to as brokerage accounts. If you use a trading platform, it may be referred to as an individual or a wealth account.
Retirement accounts offer some sort of tax benefit, like tax-free growth on your investments, which make them suitable vehicles for long-term goals. But because they offer a tax benefit, there are more rigid rules for use. For example, some retirement accounts, like 401(k) and Traditional IRAs, levy a 10% penalty on money withdrawn before retirement age (there are some exceptions to this withdrawal fee). Also, there are limits to how much money can be contributed annually to retirement accounts.
Weighing Your Options
It all comes down to the individual. You’ll need to look at your risk tolerance, time horizon, and personal preferences to determine the most suitable investing path or accounts.
For short-term goals that require more flexibility, a non-retirement account may be a better choice. Because there are no special taxation benefits, there are generally no rules about when money can be withdrawn or how much can be contributed. Because of this, non-retirement accounts can also be a good place to invest for folks who have met their maximum contribution amount for the year in their retirement accounts.
Investing With SoFi
At any given time, there are a plethora of places or vehicles in which you can invest your money. You can invest in stocks, bonds, funds, real estate — the list is long. But each has its own considerations and risks that must be taken into account. Overall, an individual’s investing strategy is the most important thing to keep in mind.
As for where to open an account, new investors may want to focus on an institution or platform where they are able to keep costs low. There’s not a whole lot that investors can control, like investment performance, but how much they pay in fees is one of them. There are lots of options for investors.
SoFi Invest offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares, but restrictions apply.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
FAQ
Which investment gives the highest returns?
Higher-risk investments tend to give the highest returns, but can also give the highest losses. These can include certain stocks or investment funds, particularly those focused on market segments that are risky or volatile.
Where can you invest your money as a beginner?
Beginners can use any number of investment vehicles to invest their money. Some choices include investment funds like ETFs or mutual funds, or even retirement accounts or plans.
Where can you invest money to get good returns?
There are numerous investment vehicles that can provide good returns, but those returns can be thwarted by down markets. Stocks and more volatile investments tend to provide higher returns, but also tend to have higher risks than other investment types.
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Whether you want to save for retirement or buy stock in your favorite company, you’re going to need a brokerage account before you can get started. Brokerage accounts are different from regular bank accounts because they give you access to securities like stocks and bonds. Not to mention some brokerage accounts come with special tax advantages.
This article will cover the best brokerage accounts you can choose from. For those who are new to investing it will also cover the basics of what brokerage accounts are and how they work.
What’s Ahead:
Overview: Best brokerage accounts for beginners
TD Ameritrade: Best overall for new investors
What sets TD Ameritrade apart is its extensive library of free educational resources that new investors can use to learn about investing.
thinkorswim is TD Ameritrade’s trading software that allows you to make trades anywhere. New investors can use paper trading to simulate investing without risking any money, while experienced investors can use the same software to test new strategies or learn new skills.
Pros
Educational library and training tools. TD Ameritrade’s suite of free resources and simulation software makes it one of the best platforms for new investors.
Customer support. TD Ameritrade is known for its world-class customer support, which is available 24/7 on most communications platforms, including Twitter.
Cons
Fewer no-cost mutual funds. TD Ameritrade only offers around 1,600 no-cost mutual fund options. This is less than some of its competitors.
No crypto trading. TD Ameritrade does not currently support cryptocurrency trades.
Visit TD Ameritrade to learn more or read our TD Ameritrade review.
Robinhood: Best mobile trading app
Robinhood was a disrupter when it launched its mobile trading app in 2015. Its mission is to provide everyone with access to wealth-building investing activities and it does this by offering users commission-free trades.
Robinhood’s app is designed for digitally-native investors. With just a few swipes, you can buy stocks and begin building your own portfolio.
Advanced traders can join Robinhood Gold, which allows you to trade on margin. Proceed with caution: Margin trading is a risky business.
Pros
No-fee trades. Buy and sell stocks, ETFs, and crypto without paying trading fees.
User-friendly app. The app is easy to use, allowing you to make trades right from your phone.
No minimum to get started. You can open a Robinhood account and start with as little as $1.
Cons
Trade suspensions. Robinhood got into some hot water after it suspended trading during the GameStop short squeeze of 2021. They’ve run into trouble with regulators over a few other issues too.
Limited options. Robinhood doesn’t give you the full suite of investment options you might find at other firms. While you can buy stocks, ETFs, and crypto on the platform, you can’t buy mutual funds or bonds.
Visit Robinhood.com to learn more or read our Robinhood review.
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E*TRADE: Best for active traders
E*TRADE is a financial services company that is part of Morgan Stanley. It offers $0 commission trades and an advanced trading platform that makes it perfect for active traders.
The platform gives you access to a wide variety of investment options including stocks, bonds, ETFs, and mutual funds. More than 4,700 mutual funds are available with no transaction fees.
Active traders have access to a suite of data tools including the Power E*TRADE app. This software offers traders access to real-time data feeds and the ability to build custom graphs.
Pros
Advanced analytics. Power E*TRADE is an advanced app with great charting tools.
$0 commissions. E*TRADE eliminated its $6.95 trade commission back in 2019. It is now one of the most cost-effective brokerage options available.
Wide selection of investments. Investors can choose from a wide variety of investment options including stocks and bonds.
Cons
No crypto trading. E*TRADE does not support cryptocurrency at this time.
Transfer fees. If you want to move money out of E*TRADE to another brokerage, be prepared to pay $25 for a partial transfer and $75 for a full transfer.
Visit E*TRADE to learn more or read our E*TRADE review.
Webull: Best for casual traders
If you’re looking for an easy-to-use, no-frills trading platform, Webull could be a good fit for you.
Webull provides a very readable dashboard of the top stocks and best-performing industries. Its mobile trading app gives you access to a range of investment options — including crypto — with no trading fees.
New investors who fund an account on the platform can even get free stocks just for joining. Terms apply.
Pros
Lots of investment options. Webull gives investors access to 44+ different cryptocurrencies, as well as fractional shares.
No educational resources. Inexperienced investors with a lot to learn probably shouldn’t turn to Webull.
No interest on uninvested cash. Some other brokerage firms partner with banks to offer interest for uninvested cash. But any cash at Webull that isn’t invested will sit idle in your account.
Visit Webull to learn more or read our Webull review.
Fidelity: Best all-in-one brokerage
Fidelity is one of the most well-known financial services companies out there. In addition to offering taxable brokerage accounts, Fidelity also has a number of tax-advantaged options, like health savings accounts (HSA).
One of Fidelity’s key selling points is its zero-expense-ratio index funds. An index fund typically tracks a specific index in the stock market, like the S&P 500. It gives you the opportunity to invest in a basket of top-performing companies without having to pick individual stocks. While most index fund managers typically charge a small fee, Fidelity is the first company to offer index funds with no fees.
Fidelity’s variety of account options also makes it a good one-stop-shop for investors. You can have a taxable brokerage account at Fidelity, along with your retirement accounts, an HSA, and a 529 College Savings Plan. Fidelity also offers a suite of educational resources to help new investors build a comprehensive portfolio to meet their personal financial goals.
Pros
Zero-expense ratio index funds. These are highly cost-effective, low-fee funds to maximize the return on your investments.
Retirement planning. Fidelity offers a library of educational resources that are great for someone looking to start saving for retirement.
Cons
No crypto. Fidelity does not support crypto at this time.
High broker fees. Fidelity doesn’t charge a commission on self-initiated trades but it does charge fees to tap into its network of financial advisors.
Visit Fidelity to learn more or read our Fidelity review.
Charles Schwab: Best customer service
Charles Schwab is another well-known financial services company that offers both taxable and tax-advantaged brokerage accounts. Schwab invests in research to build in-house expertise that anyone can use, no matter how much money they have. If you have questions or want to learn more, an expert is only a phone call away.
Charles Schwab also offers its own index funds tracking a variety of indices, including the S&P 500, large-cap stocks, the bond market, and REITs. With low expense ratios, Schwab’s index funds are a cost-efficient passive investing option.
Pros
World-class research. Schwab customer service reps are experts who can help you learn more about investing and the products Schwab offers.
Cost-effective index investing. The suite of Schwab’s low-cost index funds makes it a great option for passive investors.
Cons
No crypto. Schwab doesn’t offer direct crypto investing, but it does give you access to crypto-related products like Grayscale Bitcoin Trust.
Foreign stock fees. Schwab offers low-cost options for U.S.-traded companies, but not for foreign companies.
Visit Charles Schwab to learn more.
Vanguard: Best for passive investing
Vanguard is one the leading brokerage firms out there thanks to its famous founder, Jack Bogle. Fans of Vanguard — known as Bogleheads — follow Jack’s simple investing philosophy of letting compound interest grow over time, making Vanguard one of the best platforms for passive investors.
Vanguard is a pioneer of low-cost index funds. Investors use index funds to save money without having to develop technical expertise or make active trades. The “set it and forget it” mindset works well with Vanguard, where investors can benefit from compounding interest without paying expensive management fees.
Pros
Low-cost index funds. Vanguard offers some of the most cost-effective and best-performing index funds.
Cheap mutual funds. In addition to index funds, Vanguard’s Admiral Shares mutual funds are some of the cheapest mutual funds available. The minimum required to invest in their mutual funds is $3,000.
Cons
Not user friendly. Vanguard’s platform is a bit old school and might not be the best option for active traders.
Basic. It’s another no-frills option, so you won’t get access to advanced analytical tools or research with Vanguard.
Visit Vanguard to learn more or read our Vanguard review.
Ally Invest: Best account options
Ally Invest is the trading platform affiliated with Ally Bank. It offers no-cost trades that appeal to both new and experienced investors.
Ally Invest offers a variety of account options depending on how involved you want to be. You can choose to open a self-directed account, invest in a robo-advisor portfolio, or work with Ally’s wealth management team. This gives you the flexibility to invest on your own or to capitalize on Ally Invest’s in-house expertise.
Pros
Options for all types of investors. You can manage your own investments if you want, but Ally Invest gives you options so you don’t have to.
Integration with Ally Bank members. Ally Invest allows you to move money easily between all your accounts if you already bank with Ally.
Cons
No crypto. Ally Invest offers a variety of securities but does not support crypto at this time.
No in-person branches. Ally is fully digital, so if you’re looking for in-person support this brokerage firm might not be the best for you.
Visit Ally Invest to learn more or read our Ally Invest review.
How I chose these brokerage accounts
I chose these brokerage accounts based on three core factors:
Securities available to investors
User experience
Fees
My logic: If a platform is hard to use and has a lot of fees you’re probably not going to benefit from it. Plus, a brokerage firm with limited offerings can make it hard to build a well-diversified portfolio. A good beginner brokerage account should have low fees, a variety of investment options to choose from, and a good user experience.
What is a brokerage account?
A brokerage account is an investment account where you can buy and sell securities. These are things like stocks, bonds, ETFs, mutual funds, and sometimes even crypto.
Most brokerage firms allow you to open an account online. Many even have apps where you can get started right from your phone.
You also don’t need a lot of money to get started either. Once you fund your brokerage account, you can begin trading stocks. An important thing to note: The brokerage firm doesn’t buy securities for you. After you fund your account it is up to you to begin investing. If you don’t, your cash will just sit there collecting dust.
Types of brokerage accounts
The brokerage account you’re probably most familiar with is your retirement account. Whether you have an employer-sponsored 401(k) or your own IRA, retirement accounts are actually brokerage accounts.
Read more: A beginner’s guide to saving for retirement
Aside from retirement accounts, there are a couple of other types of accounts you’ll want to be aware of.
A self-directed brokerage account is one where you make your own stock picks. Robinhood is a good example of this type of account. Unlike your retirement account, there are no tax benefits with self-directed brokerage accounts.
If the idea of picking your own stocks is overwhelming, you can opt to work with a financial advisor. These are individuals who act as brokers and are paid on commission to make trades on behalf of their clients. Sometimes they are paid a percentage of the total assets they manage. Other times they are paid on a per-trade basis.
When you work with a financial advisor you’re essentially paying for their expertise. They pick stocks and build a portfolio based on their knowledge of the market. The more active your advisor is, however, the more it will cost you.
Read more: Do you need a financial advisor?
An alternative to using a human financial advisor is to work with a robo-advisor. These are proprietary algorithms that use technology to manage your portfolio. They basically automate the entire investing process.
One of the benefits of using a robo-advisor is that it allows you to invest in a pre-picked portfolio while leveraging investing strategies like tax-loss harvesting. You essentially get a lot of the expertise a human advisor would give you at a fraction of the cost.
These different types of accounts each come with their own costs and benefits. You’ll need to first identify your overall investing goal before figuring out which type of account will work best for you.
How do brokerage accounts work?
Brokerage accounts work like bank accounts with extra benefits. Like a bank account, you can deposit money into them. But instead of letting the money just sit there and collect interest, a brokerage account allows you to buy assets, like stocks or bonds.
Whatever assets you purchase through your brokerage account are yours to keep. At any time you can sell them (although there are some tax implications when you do this) to turn them back into cash. Some assets earn dividends that generate passive income.
You can have as many brokerage accounts as you want and there is no limit to how much money you can invest (except for tax-advantaged accounts). There are no fees to open a brokerage account, although there may be fees to make trades or to work with a financial advisor.
What is a brokerage fee?
Brokerage fees are commissions a broker charges to make trades. Sometimes you are charged a flat fee while other times you are charged a percentage of the assets your broker holds for you.
Where you’ll find the most fees is if you work with a full-service broker. These individuals are paid a fee for the trades they make on behalf of clients. You’re not actually paying them just to make trades though. You’re also paying for the research they do to build your portfolio and the expertise they bring to help you manage your investments.
FAQs
How many brokerage accounts can I have?
You can have as many brokerage accounts as you would like. In fact, you’ll probably want to have several different accounts depending on your goals.
A retirement account, for example, is going to be different than an account where you buy and sell stocks frequently. Retirement accounts are tax-advantaged and because of that, they have contribution limits. If you use an employer-sponsored retirement plan, you might not even get a say in who brokers your account.
A taxable, self-directed account where you buy and sell individual stocks is different than a retirement account. For a self-directed account, you might prefer to use a brokerage firm with an easy-to-use app to make daily trades.
Are brokerage accounts FDIC insured?
No, brokerage accounts are not FDIC insured. But that’s not exactly a bad thing.
The FDIC — or Federal Deposit Insurance Corporation — protects deposit bank accounts (aka your checking and savings account). They don’t protect money invested in the stock market or other investment instruments.
Those investments are protected by a different agency called the Securities Investor Protection Corporation (SIPC). The SIPC will intervene if a broker goes bust. In that event the SIPC will either transfer your portfolio to another firm, or they will work outright to rebuild it, buying new assets to make up for any that are lost.
Like the FDIC, SIPC does come with some stipulations. For one, a brokerage has to be a member that qualifies for SIPC coverage. And that coverage is limited to up to $500,000 per customer.
How are brokerage accounts taxed?
Brokerage accounts are taxed differently depending on the type of account you have and how long you hold assets for.
Retirement accounts are usually tax-advantaged. In the case of a traditional 401(k), this means that you won’t pay taxes on your account contributions, but you will pay taxes later when you withdraw money in retirement. However, in the case of a Roth IRA, you will pay taxes on your account contributions, but won’t pay taxes on the withdrawals in retirement.
Read more: IRA vs. 401(k)
Self-directed brokerage accounts don’t come with any tax benefits. You invest money that has already been taxed and you pay taxes on your investments when you sell.
Selling an asset triggers a taxable event. If you’ve held it for less than a year it is considered a short-term capital gain. This is taxed at your current income bracket.
If you hold an asset for a year or more, however, it will be counted as long-term capital gains. You’ll pay between 0% and 20% depending on your tax bracket. Long-term capital gains taxes are usually lower than income taxes, which is why it’s advised to hold onto a stock for at least a year before selling it.
Summary
A brokerage account gives you the ability to put your money to work. Most firms offer access to securities like stocks and bonds, while others give you access to cost-effective index funds. These are ways you can grow your money beyond collecting interest in a savings account.
You can have as many brokerage accounts as you would like, and those accounts can vary depending on your goals. If you’re not sure where to get started, set a financial goal — like saving for retirement — and find a brokerage firm that gives you the best bang for your buck with respect to that particular goal.
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If you have been trading for a while, then there is a good chance that you have made some trading mistakes along the way.
Unfortunately, it is part of learning how to trade.
After all, trading is a skill that takes time to learn.
Trading mistakes are part of the learning process. I know that sucks to hear, but it is the truth.
The outcome goal is to learn from those trading mistakes.
Then, you can realize what you did wrong so you do not repeat those same mistakes.
However, more than not, it is more common to repeat the same mistake over and over again.
If you are ready to recognize trading errors and learn how to overcome them, then keep digging in. Take notes and adjust your trading plan accordingly.
We will cover emotional trading mistakes, technical trading errors, and option trading mistakes.
What Are Trading Mistakes?
Trading mistakes are errors made by traders when you enter trades, either to purchase stocks or options.
More than likely, you will see the same type of trading error happening over and over again.
Trading mistakes are very common, but they do not have to lead to complete panic.
In order to minimize the chances of making a costly mistake, traders should adhere to their trading strategy. Additionally, traders should always trade with a clear head and stay disciplined.
There are plenty of trading mistakes you can avoid by being smart and adjusting your trading plan where needed.
Why Understanding Trading Mistakes Is Important for Long-term Success
Trading mistakes are the result of traders taking losing trades, which can result in poor overall performance.
Mistakes that occur during trading often include not paying attention to the market, not understanding risk, not having a well-thought out trading strategy, and being bad at managing the trade.
Whatever the reason, trading errors occur and it is how we react to them that matters.
Long-term success in trading is not a goal that can be accomplished overnight.
Achieving long-term success with active trading requires patience, discipline, and practice.
It is easy to get caught up in day-to-day successes and forget to commit to a long-term plan. As traders, it is important to be able to recognize our mistakes so that we can learn from them and move forward.
Top 5 Trading Mistakes
As you will see, we compiled a long list of trading mistakes. Each trader will see some of those trading errors in themselves. Some are small trading mistakes while others are detrimental.
First, we are going to focus on the top five trading mistakes first. This will make or break your success as a trader.
The following are five common trading mistakes that traders make and how to avoid them.
#1 – No Trading Plan
Trading without a plan means you enter a trade without knowing your next step.
No trading plan means that traders are not able to set clear goals, establish risk-reward ratios, and avoid common pitfalls that can occur during a trade. This makes it difficult for traders to know when they should be buying, selling, or holding.
Trading without a plan is risky because it can lead to losses that are much higher than they need to be.
When starting out in trading, it is important to remember that we can only focus on what we can control. This means that we should not worry about things we cannot change, such as the past or the behavior of other traders. Instead, we should form a trading plan and stick to it so that we can succeed in the long run.
Creating your trading plan will happen with many revisions. The goal of the trading plan is to set your overall strategy for trading.
Also, you need to have a specific trading strategy for each trade you enter.
Avoid by: Spending time to develop a trading plan. Revise as needed. Stick to it.
#2 – Risk Management Plan is Missing
A risk management plan is essential for traders and it should be included in any trading plan.
Without a risk management plan, traders are more likely to make emotional decisions that can lead to costly mistakes. For many traders, this is the hardest thing for them to manage.
It is possible to create a risk management plan as your overall trading plan.
In your risk management plan, you must decide (in advance) how much money you are willing to lose based on the amount of profit you perceive to make. For instance, you are willing to risk $300 in order to make $1000.
Many day traders focus on a 2:1 reward-to-risk ratio. Personally, I look for stronger reward-to-risk ratios greater than 3:1.
Avoid by: Understand how risk is a part of making a profit. Set your risk tolerance and do not deviate from it.
#3 – Not Keeping a Trading Journal
One of the most important aspects of successful trading is keeping a journal.
This not only helps you keep track of your trades and performance, but it can also help you remember what worked and what did not. Journaling is so helpful and such an overlooked task.
Your trading journal is the perfect place to take notes, keep track of your wins and losses, and record market movements so that you can learn from past mistakes.
At the end of every trading session, you should take some time to analyze your trades.
What went well?
What didn’t go well?
Why did you make that particular trade?
What was your entry strategy?
What was your exit strategy?
Where was the overall market momentum?
Did you control your emotions?
What grade would you give yourself?
This analysis is important so that you can learn from your mistakes and improve your trading skills. Stay motivated to continue learning about trading and keep more profit.
Avoid by: Start journaling. Spend time after exiting a trade and the market day to understand what happen and why you did a certain trade.
#4 – Watching Too Many Stocks
Watching too many stocks can lead to a decrease in returns and overall confusion on what is happening with your watchlist.
As a result, it is important to be selective.
The same can be said of stock scanners. If you are watching too many variables and possibilities, you can quickly become overwhelmed.
When you develop your trading plan, you need to decide how you find stocks.
Personally, I prefer to focus on a handful of stocks and a few key metrics. Then, watch them closely and trade accordingly.
As a new trader, I would pick about 5-10 stocks to analyze.
Avoid by: Revise your watchlist to half what you are currently watching.
#5 – Actually Exiting Trade as Planned
Above we talked about creating a trading plan and having a trading strategy for each trade taken.
But, the trading mistake happens when you do not exit the trade as planned.
This could be because of “hopemium” that the stock price will recover and you will get back your loss.
Our “hopemium” is that the stock price keeps rising and you will make more money.
Either one can be damaging to your trading account.
You created a plan. As a disciplined trader, you must follow your plan either to maximize your current profit or protect your risk against further losses.
Avoid by: Exiting at your set targets. Period.
12 Typical Emotional Trading Errors
Trading is 80% mental and 20% execution. Okay, I am not sure that there is an official study to back it up. But, I do know as a trader that emotions play heavily into your overall profit.
The typical emotional trading errors that traders make when they are in a trade are overconfidence, jumping into trades before the proper analysis is completed, and inability to take losses.
This is where most of the trading mistakes are made.
When first starting out in trading, it is easy to get caught up in the prospect of making a lot of money quickly. However, most traders find that trading is not easy to do and make common emotional trading errors.
Let’s dig into these emotional mistakes first and then we will follow up on the technical trading mistakes.
1. Letting emotions impair decision making
Emotions are an important part of decision-making, but it can be dangerous to allow them to influence our decisions. We should also take into account that emotions can often lead us astray.
It is clear that emotional trading can lead to bad decision making and, ultimately, financial losses.
When investors let their emotions take over, they are not thinking logically and may make impulsive decisions. For example, they may sell stocks when the market is down in order to avoid further losses, even though the stock may rebound soon after.
In order to be successful traders, it is important to stay calm and rational when making decisions.
Overcome by: Stick to your trading plan and take emotion out of the equation.
2. Unrealistic Profit Expectations
You go into every single trade expecting a home run! Enough money to achieve your dreams overnight!
These types of profit expectations will have you throwing your risk management plan out of the window and set you up for failure with greed, overconfidence, and impatience.
Be realistic about your expectations with trading activity.
Overcome by: Go for base hits. Small consistent wins.
3. Greed
Greed is a deep-seated need for more profit without regard to the chart or market conditions.
The common rationale is hopefully the stock will go up. Typically, you hold your position too long and end up losing some of your gains.
Greed can manifest in many different ways, and people with greed often neglect their own needs in order to attain more.
Overcome by: Set an OCO bracket to exit the trade at your specified level. Take you out of the equation.
4. Fear of Missing Out (FOMO)
You fear that you missed out on a trade, so you decide to jump in. As a result, you are risking more than you should.
This trading mistake is common, especially with online trading communities.
As a result, you may buy at the high and watch the stock reverse.
Overcome by: Realize that there will be missed opportunities. That is part of the game. There will always be another chance.
5. Fear
In many cases, fear is a reaction to why or why not we enter a trade.
For any trader, they may become frozen unable able to make a decision as their mind is wrapped in fear. At the same time, they are either missing out on potential profits or unable to exit a trade due to mounting losses.
Overcome by: This is a real emotion that you must overcome. Take the time and read resources to help you overcome being paralyzed by fear.
6. Overconfidence after a profitable trade
The overconfidence that comes with success can lead to a loss of profits.
When a trader has a winning position, they may become overconfident and make bad decisions because of the previously profitable trade.
For example, they may not take their profits off the table when there is an opportunity to do so or increase their position size when they should be taking profits. This could lead to them losing all of their winnings and more.
Overcome by: Take a break from trading for a few days or a week after a big win.
7. Entering a Trade Based on Your Gut
The process of entering a trade based on your gut is, essentially, following your “gut feeling” and buying or selling shares after the market opens. This is seen as a more risky and less profitable strategy than following a more traditional market timing approach.
Trading is all about making calculated decisions and sticking to a plan.
Trading based on your gut feeling or emotions will only lead to costly mistakes.
Overcome by: Before entering into any trade, make sure you have a solid strategy in place and know all the rules. Only then should you start trading.
8. Not reviewing trades
Not reviewing trades is a common problem for many traders. Traders who don’t review their trades tend to be more likely to make mistakes in their trading and over-trade, which can result in losses.
You will make the same mistake over and over again until you realize the root of the problem.
This is how you move from a losing average to a winning percentage.
Overcome by: Let your journal be your friend. Document everything including your emotions.
9. Following the Herd
Many people enjoy following the herd with stock trading, especially online platforms on Reddit, Discord, or Twitter.
You may decide to follow a certain group of people in order to be fed stock picks or updates.
This can be risky because there is no sound foundation to base your trade upon.
Overcome by: Trade your style and let that fit you.
10. The Danger of Over-Confidence
The “beginner’s luck” experienced by some novice traders may lead them to believe that trading is the proverbial road to quick riches.
Over-confidence is the belief that one’s abilities, knowledge, or qualities are better than average.
This over-confidence is a risk factor for certain types of mistakes and other negative outcomes as it leads to complacency, a lack of preparation, and an overestimation of one’s abilities.
Overcome by: Realize your limitations and watch for overconfidence to appear.
11. The Importance of Accepting Losses
Losses are always a part of trading life, but they can be overwhelming when they occur.
It is important to recognize that losses are in fact an inevitable part of growth and development as a trader.
Overcome by: Journal all of your losses. Look for patterns to appear. Adjust your trading strategy as appropriate.
12. Quit Your Job Too Fast
Quitting your job too fast is not a good idea, as it will force you to place trades that may not be the best set-ups.
Day trading can be a very risky venture, and it is possible to lose everything you have invested.
It is important to be aware of the risks before getting started. More importantly, do not quit your job too fast. This can lead to losses in your investments and could potentially put you in a worse financial situation than you were before.
Overcome by: Keep trading as a side hustle. Hone your trading skills and build up a reserve fund that will cover your monthly expenses. You will know when you are prepared to leave your 9-5.
Common Mistakes in Stock Trading
According to a study by the U.S. Securities and Exchange Commission, technical trading mistakes are actually fairly common among individual investors.
Mistakes in technical trading can be two-fold, either due to lack of knowledge or poor execution.
The most common mistakes are buying at the top and selling at the bottom, overtrading, and not taking the time to properly understand how trading works.
Now, let’s dig into all of the common trading mistakes I see.
1. Overtrading
Let’s start by talking about overtrading. This is a mistake that I see many people make. It is also a mistake that could have been easily prevented if you had just done your research before placing the trade.
Overtrading or placing more orders than you should do is the most common mistake.
Many new traders will simply open up their platform, look at the market, and place a trade. They are often chasing after the last couple of candles or they see an opportunity to get in “on the cheap”.
The problem with this approach is that you have no idea if this is a good trade or not. You are simply taking a shot in the dark and hoping for the best.
Overcome by: Only place the A+ setups that you like. Once you have traded so many times per day or week, stop trading.
2. Buying High and Selling Low
We all have heard the saying, “buy high and sell low.” However, too many novice traders do the complete opposite.
This trend happens with one of the emotional mistakes of FOMO; we already dived into that concept earlier.
Overcome by: Follow your trading plan on when to enter and exit the trade. Practice your strategy in a simulated account and master it.
3. Lack of Trading Knowledge
The lack of trading knowledge is a problem for many traders who are not familiar with how the stock market works. This can cause them to make mistakes when buying and selling stocks, which could result in losing a lot of money.
Just because you made a profit once on one stock does not mean that is a repeatable action.
In order to be successful in trading, it is important to have a good understanding of the markets and the strategies involved.
Without proper training, you are likely to make costly mistakes that can cost you money. Trading courses and tutorials are available online and through other resources to help you gain this knowledge and become a successful trader.
Overcome by: Take an investing course. Spend money on your education and not your losses. Here is a review of my favorite day trading course.
4. Following Too Many Strategies
Following too many strategies is a common problem in the investing world, which can lead to poor performance and more costly mistakes.
There are a million and one different approaches on how to trade the stock market, which indicators to use, whose advice you should follow, so on and so forth.
And then, many traders try and couple the strategies together only to quickly learn they may cause more losses than profits.
One way to avoid following too many strategies is by using a set of rules to decide which strategies are appropriate for investing.
Overcome by: Develop your trading plan. Outline the investing strategies you will use. Test any new strategies in SIM first.
5. Do Your Research
The solution to this problem is simple: do your research!
Before you enter a trade, take the time to do some analysis on the asset you are looking at. Look at past price action, news events, and any other relevant information that you can find.
Understand why the market might move in your favor and be able to build a case for it. The more data points you have supporting your position, the better off you will be.
If you are able to build a strong case for why the asset will move in your favor, then you can enter with confidence. This is because if the market does not move in your favor, you will know that it isn’t because of a lack of research on your part.
When you enter with confidence, this will make it easier to hold through the inevitable volatility and price swings.
Overcome by: If you enter without knowing why something is likely to move in your favor, then you are setting yourself up for failure. Do your research.
6. Not Using Stop-Loss Orders
Stop orders come in several varieties and can limit losses due to adverse movement in a stock or the market as a whole.
Tight stop losses generally mean that losses are capped before they become sizeable. However, you may have your stop loss too tight and get stopped out before your stock has room to move.
A corollary to this common trading mistake is when a trader cancels a stop order on a losing trade just before it can be triggered because they believe that the price trend will reverse.
Overcome by: Plan your stop loss in advance. Stick to it as it is part of an overall risk management strategy.
7. Letting Losses Grow
Active traders can be harmed by refusing to take quick action to close a losing trade.
It is important to take small losses quickly and limit your risk in order to stay profitable.
Stop losses can help you avoid larger losses.
While the stock may come back to your buy price, you have increased your risk far beyond what you planned. If your planned loss was $300 and now you are down over $500, it will take that much longer to overcome that growing loss.
Cut your losses. Review the chart. See what a better entry point may be.
Overcome by: If the stock moves past your pre-determined stop, then exit the trade. Don’t trade on hope.
8. Chasing After Performance
Many day traders are tempted to chase stocks, which is a bad reputation in the day trading world.
This happens when they see a stock that has had a large price increase and they think that it will continue to go up. In reality, this is not usually the case, and chasing stocks can lead to big losses.
What goes up must come down, right?
Overcome by: Wait for a better time to enter the trade according to your trading plan.
9. Avoiding Your Homework
It is important to do your homework. If you avoid doing your homework, then don’t expect fast results
Many new traders often do not do their homework before making any investment decisions.
This can lead to costly mistakes that can be avoided by doing some basic research. Trading is a complex process and should not be taken lightly – make sure you are fully prepared before risking your hard-earned money.
Overcome by: If you have not enrolled in an investing course, do that. Set daily goals on how to improve your trading performance that is not based on profit or loss.
10. Trading Difficult and Unclear Patterns
It is important to stick with the patterns and indicators that are clear and unmistakable so you don’t get caught up in any ambiguous or unclear trading signals.
With a little bit of research and understanding, these market patterns can become quite clear.
By forcing a chart to fit in what you want, then you are putting your trading capital at risk.
Overcome by: If you cannot read a clear chart or pattern, then quickly move to the next stock.
11. Poor Reward to Risk ratios
The most common mistake made by traders is poor risk management. This usually means taking on too much risk in relation to the potential rewards, which can lead to heavy losses if the trade goes wrong.
It is important to always have a solid plan for how much you are willing to lose on any given trade and never deviate from it.
What is the Reward to Risk ratio you look for:
1:1 Reward to Risk
2:1 Reward to Risk
3:1 Reward to Risk
Many beginner traders do not want to take on as much risk because their appetite for potential rewards may be lower. It is important for beginners to consider their trading strategies and risk management plans so that they can make the most informed decisions possible.
Risk-to-reward ratios are an important part of trading, and experienced traders are typically more open to risk in order to maximize their potential rewards. This means that they may be more likely to make high-risk, high-reward trades.
Overcome by: Stick to Risk to reward ratios that fit your trading plan.
12. Ignoring volatility
Volatility is the fear and unknown in the market.
The most important thing to remember about investing is that the stock market can be volatile.
A measure of volatility is from the VIX.
Overcome by: Decide how you will trade when the VIX is high and the news is negative.
13. Too Many Open Positions
Entering too many positions is one of the most common mistakes investors make. A portfolio should consist of a handful of top-performing investments that have proven to be good bets over time.
It is unwise to open too many positions in a short amount of time because it could lead to confusion.
This can be risky because if one or two of the positions go south, the entire portfolio can suffer. For this reason, it is important to carefully consider each position before opening it and make sure that all positions are contributing positively to the overall goal.
Overcome by: As an active trader, stick to under 5 open positions. As a long-term investor, look to build a portfolio of 25 stocks over time.
14. Buying With Too Much Margin
Most brokers offer 2:1 or 4:1 margin to cash. While this is tempting to use, it can also give you a margin call.
Margin can help you make more money by increasing your position size, but it can also exaggerate your losses.
Exaggerated gains and losses that accompany small movements in price can spell disaster for a new trader using margin excessively.
Overcome by: Use your cash only. Stay away from using margin.
15. Following Meme Stocks
These are the stocks made popular by many Reddit personal finance groups.
You have probably heard of Gamestop, Blackberry, AMC, or Bed Bath and Beyond as a meme stock.
While these stocks have risen to crazy highs, they have also fallen just as fast. Chasing the high may leave you with a big and painful loss.
Overcome by: Stick to your stock watchlist.
16. Buying Stocks With No Volume
Buying stocks with no volume is a risky idea that involves placing an order on a stock without knowing how much interest there will be in the shares. This can result in losing money if there are no buyers for the shares.
It is important to validate the price of a stock by looking at volume. The volume shows how much interest there is in a stock and can be indicative of future price movement.
When volume is low, it’s best to stay away from buying stocks as it could be a sign that the stock price is not stable.
Overcome by: Trade stocks with a volume of at least 500,000 or higher.
17. Ignoring Indicators
Indicators are things that tell us the market is going up or down. Examples of indicators would be the stock market at a particular point in time, a company’s performance with regards to earnings, the price of a product or service.
Every trader has their own set of indicators they use.
If you have outlined indicators you use in your trading, make sure to follow them regardless if it is against the way you want the stock to move.
Overcome by: Stick to your trading plan for each stock individually.
18. Trading Too Large Position Sizes
Trading too large position sizes is a risk that traders may run into when they hold positions in their portfolios for extended periods of time.
Position size is the amount of money placed on a trade, and the risk is that a trader may lose more than their capital on the trade if it does not go well.
Overcome by: Base your position size on the amount you are willing to lose. Not how much you want to make.
19. Inexperienced Day Trading
In order to be successful in trading, it is important to have a good understanding of the markets and the strategies you are using. Without proper training, it is easy to make costly mistakes.
Too many day traders turn trading into an unnecessary risky game.
To be successful, a day trader must have a solid foundation in how to invest in stocks for beginners.
Overcome by: Practice in a simulated account and make all of your mistakes there before moving to live money.
20. Inconsistent trading size
Inconsistent trading size is when traders are unable to predict what their position size should be in order to meet the trader’s desired profit goal.
Trading size is one of the most crucial aspects of a trading strategy and should be considered carefully. Larger trade sizes come with an increased risk, so it’s important to be aware of your position size when making trades.
Overcome by: Don’t risk too much on one trade. Stick to your risk management plan.
21. Trading on numerous markets
Trading on numerous markets is when a trader invests in stocks, bonds, commodities, crypto, and other securities.
Every type of market moves differently and takes time to understand how to be profitable.
Overcome by: Find your niche and stick to it.
22. Over-leveraging
Leverage is a powerful tool that can be used to magnify gains and losses in a trade. It is important to be aware of the amount of leverage being used in order to effectively manage risk.
Brokers play an important role in protecting their customers by providing margin calls and other risk management tools.
Overcome by: If you feel over-leveraged, sell some positions before your broker gets involved.
23. Overexposing a position
Overexposure is a term used in the investment world to describe the risk that comes with exposing your position too much in the market. When you have overexposed your position, you are putting yourself at risk of losing money if the stock or security you are invested in falls in value.
You are taking on too much risk.
Overcome by: Stick to your risk management plan. Always have cash reverse on hand in case the market reverses.
24. Lack of time horizon
There are different time horizons for various types of trading strategies. It is important to think about the time horizon you are comfortable with before investing in any type of investment.
If you are a day trader, you plan to close your trades before the end of the trading session. As a swing trader, you typically hold trades for a couple of days maybe up to a month. As a long-term investor, you plan to hold your stocks for longer than a year.
Overcome by: Match the time horizon of that investment purchase with your investing goals.
25. Over-reliance on software
Although some trading software can be highly beneficial to traders, it is important not to over-rely on it.
Automated trading systems are becoming so advanced that they could revolutionize the markets. As a result, human traders need to be aware of the potential for these systems to make mistakes and use them in conjunction with their own judgment.
Overcome by: Set alerts before you want to enter or exit a trade. Then, review if the move still follows your trading strategy.
Top Options Trading Mistakes Beginner Traders Make
These options trading mistakes are specific to option trading.
Trading options is an advanced strategy. If you have losses trading stocks, wait before you start trading options.
1. Not having a Trading Plan
Every trader needs a trading plan that outlines strategies, game plans, and trade metrics.
When you are trading without a plan, you are essentially gambling and hoping for the best.
This is not a recipe for success in the world of stock trading and is especially true for options traders.
A good trading plan should include chart analysis so that you can make informed decisions about when to buy and sell stocks. If you are using HOPE instead of a trading plan, then you need to find out the right way to interpret the chart because that will give you a better idea of what is happening in the market and how likely it is that your investment will succeed.
Overcome by: Create a specific trading plan based on your option strategy.
2. Not properly Researching Option Contracts
Learning to trade options is like going to school for a whole different trade.
There are way too many technical aspects to discuss in this mistake.
Spend time learning what criteria you want from an options contract to be successful.
Overcome by: Learn how options work and practice trading options in the simulator before going live.
3. Trading without an understanding of the underlying asset
Before you start trading options, trade with stocks.
Every stock moves at its own beat. You need to learn how it moves.
Jumping into options prior to knowing the stock can cause extreme losses. Learn how the underlying asset moves first. Be successful in trading stocks before moving to options.
Overcome by: Learn to trade the stock with shares first. Then, practice in a simulator. Once familiar, then trade live with options.
4. Buying Out-of-the-Money (OTM) Call Options
Options trading is a risk-based strategy. It’s important to know which strategies are right for you and what the risks of each option type are before putting on an option trade.
One common mistake that many traders make when it comes to option trades is buying out-of-the-money (OTM) call options.
This is because OTM call options are inexpensive and have a range of around 100,000 to 1 million. To avoid this mistake, it’s important to know what the risks of buying OTM call options are and which option strategies are appropriate for you.
Overcome by: Focus on trading In-the-money (ITM) call contracts. Know your strategy.
5. Not Knowing What to Do When Assigned
When you enter into an options contract, you are essentially agreeing to buy or sell the underlying asset at a specific price on or before a certain date.
If the market moves in a way that benefits the buyer of the option (the person who contracts to buy the asset), they can choose to exercise their option and purchase the asset at the agreed-upon price. However, if the market moves in a way that benefits the seller of the option (the person who contracts to sell), then they may “assign” their contract to someone else – meaning that they no longer want to buy/sell the asset, but would like someone else to take on that responsibility.
This can be jarring if you haven’t factored it into your decision-making when trading options, so it is important to be aware of the possibility.
This is why traders need a higher trading level to sell options contracts or verticals.
Overcome by: Be okay with buying the shares if you are assigned. That is a part of your trading plan.
6. Legging Into Spreads
It is a common mistake for traders to get legged into spreads by entering positions when the market price has moved away from their position. They may have gotten caught up in the belief that they are being a “smart” trader by trying to profit from the spread.
The problem is that they are not taking into account that their cost basis must go up in order to maintain the position. If the market price of the underlying goes up, their cost basis must go up as well.
Overcome by: If you are not comfortable with this advanced strategy, then exit your options contract and place a new one.
7. Trading Illiquid Options
Trading illiquid options is a mistake because traders are taking on too much risk, with potentially disastrous consequences.
Illiquid means that the option cannot be bought or sold at the given time.
In other words, the option is not tradable. When traders trade illiquid options, they are taking a risk that their trades will not be executed because there is no liquidity in the market at that time. They have to hope that the market will become liquid again, and they can then sell their position or buy back their option at a lower price.
Overcome by: Check option volume and open interest at your strike place. Verify you have interest in moving your contract.
8. No Exit Plan
It is important to have a plan in case your trading strategy doesn’t pan out as planned.
This will give you the peace of mind that you won’t be left high and dry without an exit strategy.
With options is it more difficult to limit your risk to reward. As a result, you must decide your exit plan in advance.
Overcome by: Develop your trading strategy and include how and when you will exit the option contract.
Ready to Avoid these Trading Mistakes?
Investors are often their own worst enemy when it comes to trading.
They make emotional decisions instead of logical ones, and this leads to them making costly mistakes. Plus there are many technical errors new and seasoned traders are still making.
In order to be successful in the markets, investors must first learn to accept their losses and move on. Only then can they put that mistake behind them and focus on making profitable trades in the future.
In this post, I shared some of the more common trading mistakes that people make and how to avoid them.
Now, you have to work to avoid these trading mistakes and be profitable.
Know someone else that needs this, too? Then, please share!!
Investing isn’t new to me. I opened my first CD in high school back in the good old days of 5 percent interest, and I started contributing to my 401(k) as soon as I was eligible (at age 21). I did everything right according to the articles I read. I:
Contributed enough to get the maximum employer match
Saved/invested around 10 percent of my income
Opened up an IRA
Before I break my arm patting myself on the back, let me tell you that I made a huge error. I stopped too soon in my investing education. Instead of continuing to learn, I rested on my investing laurels — and who knows how much money I’ve lost out on because I forgot that no one cares more about my money than I do.
And my huge error led me to make many mistakes. For instance, I didn’t realize until (embarrassingly) recently that different funds in your 401(k) have different fees. Selecting funds with low fees can make a huge difference in returns. Or “buy and hold” is not the same as “buy and forget about it.” And then there’s the issue of investing and taxes.
But doing something (even if I didn’t evaluate or understand my choices) is better than nothing, right? So there I stayed, comfortable in my stinky 401(k), letting my financial adviser make fund recommendations for my IRA.
Until this year. This year, I vowed to tackle my investing fear and ignorance. I’ve been reading old posts on Get Rich Slowly, collecting a list of investing books I want to read and perusing investing websites. I’ve created this list (along with my impressions of each resource) to help me learn more about investing, and I hope it helps you, too. It’s not an exhaustive list, of course. Also, in the interest of full disclosure, I get no compensation for including any of these resources.
Get Rich Slowly Blog Posts
For new readers, I dug through the GRS archives to find some solid investing posts. I wanted the posts to highlight different investing strategies and philosophies. I’m sure I missed a few, but this should save you from poking around the Investing archives — at least a few minutes, anyway.
Dividend-paying stocks This is a fairly recent post, focusing on dividend-paying stocks.
Roth IRAs Here is a great post on Roth IRAs.
Developing an investment policy statement – Before starting to invest, analyze why you are investing. What’s the point? Figuring that out first will help you form an investing strategy.
How the stock market works – The day this post ran was the day I understood more about the stock market. Sure, things have changed since this 1952 video, but the basics are still the same.
DRIPs This post succinctly covers dividend reinvestment programs.
Mutual funds Here is a great introduction to mutual funds.
Index funds This post describes why many people (including J.D.) have most of their portfolios in index funds.
Bonds No list would be complete without mentioning bonds.
Mutual fund prospectus Part of becoming an educated investor involves understanding where your money is going. Here’s how to read (and understand) a mutual fund prospectus.
Books
Best books on investing – This post covers eight well-known investing books, but it’s missing some good ones.
One of the good ones it’s missing is Peter Lynch’s “One Up On Wall Street.” It’s old, but I like his focus on simplicity and buying what you know.
“Control Your Cash” by Greg McFarlane and Betty Kincaid is another favorite. This book actually covers all the usual financial topics (credit scores, buying a car and a house, taxes, etc.), but has a couple of chapters on investing and securities. What I like about this book is that it explains investing in a way that I can understand, using a writing style that is funny and still pertains to a wide variety of investors.
Other Blogs and Websites
Bite the Bullet Investing This just-launched blog appears to be created for the investing novice. Posts cover terms such as equity and return and topics like using other people’s money. Great if you’re just starting out.
SEC guide Use this guide to learn how to read financial statements. I think this is a very easy to understand set of terms.
The Oblivious Investor This site is organized well and Mike Piper writes clearly, without a lot of “fluff.” I found his information on index funds to be easy to understand. I haven’t checked out any of his books, but he’s written several on various topics. I think he appeals to a wide variety of investors.
Seeking Alpha This site has been mentioned several times in the comments of various GRS articles, so I thought it was worth checking out. It covers individual stocks and has some great articles. To read the entire article, you must register (though it’s free, I dislike the extra step). If you’re serious, it has a Pro subscription service in addition to the free information. I think there is some great information here, but it’s too advanced for me at this time.
The Motley Fool One of my favorite articles on the site is “13 steps to investing foolishly.” Like Seeking Alpha, they offer a premium subscription service along with their free information. This site has something for a range of investors. (GRS contributor Robert Brokamp is the Fool’s adviser for its Rule Your Retirement service.)
Morningstar has 172 free investment courses. Topics include “Investing for the long run” and “The magic of compounding.” Did I mention they were free?
Guide to Transparent Investing Frankly, I’m overwhelmed reading my own list. But if you pick anything from this list, please read this guide. Published in 2007, this 53-page discusses DIY financial planning, risk tolerance, and how to create a portfolio to minimize the bite of taxes. It explains fundamental concepts well and includes charts. I wish I’d read this guide years ago.
When doing a list like this, it’s so easy to miss lots of great resources. Which ones would you add?
If you want people to read your investing-related post or book, you’ll increase your chances by mentioning Warren Buffett in your title. After all, I just did it — and it might be why you chose to read this. Every financial media company does it, including us at The Motley Fool.
His investing skills while the chairman and CEO of Berkshire Hathaway have made him the fourth-richest man in the world. Most of the articles and books about him attempt to dissect his investing strategies and explain how you can use them to identify your own winning stocks. So it was a bit surprising when Larry Swedroe wrote Think, Act, and Invest Like Warren Buffett. He’s the director of research for the BAM Alliance of independent financial advisers, the author of several books, and a blogger on CBS Marketwatch. He also thinks that picking individual stocks — as opposed to investing in index funds — is a really bad idea.
I’ve chatted several times with Larry over the years, because he’s as smart as they come on the topics of asset allocation and financial planning. Recently, we had a conversation about why he would write a book singing the praises of the world’s most famous stock picker. Of course, that whole “increase sales by including Buffett in your headline” thing probably had something to do with it. But it’s not just a gimmick; Larry has three main arguments for why the index investor should still listen to the Oracle of Omaha, and he uses actual quotes from Buffett to back them up. And it starts with…
1. Warren Buffett recommends index funds
It may not be widely known, but Buffett is actually a fan of index funds. Here’s what he wrote in his 1996 annual letter:
“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals. Seriously, costs matter.”
Buffett’s a smart fellow, and he knows his history and his statistics; both establish that it’s pretty darn hard (though not impossible) to outperform an index fund over the long term. Obviously, he doesn’t think this applies to him — he still keeps picking individual stocks (or buying companies outright). But he recognizes the great value of the index fund. The same goes for us at The Motley Fool. My colleagues devote a great deal of time and energy to finding great stocks. But we also have a room named after John Bogle, the founder of the Vanguard family of mutual funds and one of the primary progenitors of the index fund. (Next to the entrance to our Bogle room, we have a picture of Mr. Bogle wearing a Motley Fool cap during one of his visits to our office. It’s pretty cool.)
2. Warren Buffett ignores market forecasts
Wade into the waters of the ever-flowing financial media, and you’ll see an endless flotilla of gurus offering their assessments of where the market is headed. Buffett thinks you should pay them no heed:
“We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie [Munger, vice chairman of Berkshire Hathaway] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
In case you need some stats to back that up, CXO Advisory Group analyzed the predictions of 68 “experts” from 2005 to 2012. As a group, they were right less than half the time. You would have been better off flipping a coin than listening to these people.
During our most recent discussion, I asked Larry Swedroe why these people still have jobs. He had a few reasons, but one in particular stood out: “I have come to the conclusion, after my long years of experience both as an adviser to some of the largest corporations in the world on managing financial risk and as adviser to individuals and endowments, that there’s an all-too-human need for us to believe that there’s somebody out there who can protect us from bad things.” I think he’s on to something. Unfortunately, market predictions just create — rather than offer protection from — bad things.
3. Warren Buffett doesn’t try to time the market
You won’t see Berkshire Hathaway buying and selling its stocks or businesses too often. Once a company joins the Berkshire family, it’ll likely be in there for quite a while — decades probably. Here’s what Buffett said about it:
“Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”
My very first post on Get Rich Slowly was about attending the 2009 Berkshire Hathaway annual meeting. It happened in May, just two months after the stock market hit bottom after dropping more than 50 percent. It was a dang scary time.
During that annual meeting — and at just about every annual meeting over the past several years — the topic of Buffett’s and Munger’s successors came up. After all, Buffett is 82 and Munger is 89. They didn’t name names, but they have some people in mind. However, it won’t be someone who tries to move in and out of the stock market. Here’s what they said:
Munger: I don’t think we’d want an investment manager who would want to go to cash based on macro factors. We think it’s impossible.
Buffett: In fact, we’d leave out someone who thought he could do that.
The important three questions
The main argument that Larry makes in his latest books is this: If you agree that Buffett is one of the greatest investors of all time, then take his advice. And the next time you’re inclined to act according to some expert’s forecast market forecast, Larry has three questions you should ask yourself:
Is Warren Buffett acting on this expert’s opinion?
If he isn’t, should I be doing so?
What do I know about the value of this forecast that Buffett and the market in general doesn’t?
As Larry told me, “If someone has already told you that they think Buffett’s the greatest investor, it’s hard for them to say that they should do the opposite of what he’s advising them.”