You are going to have a hard time in the markets if you find yourself with a brand new Robinhood account asking yourself,“what stocks should I buy??”
People like us are“dumb money”
Don’t take it personally.
If you don’t sit at a trading desk staring at a Bloomberg terminal all day, move millions of dollars on a regular basis, or know what“vanna-volga pricing” means, well, welcome to the dumb money club. It’s a big club. We’re also known as“retail investors,” but I prefer the endearing simplicity of“dumb.” Feels like middle school. And I was crushing it in middle school.
My parents got divorced and I sang an original song called“two sides to every story” at our talent show and that was pretty awkward for them.
There are a couple thousand people out there who get paid big bucks by large institutions to trade and invest.
They have analysts working day and night to provide the latest and greatest insights on individual companies. They have Stanford data scientists hacking away at algorithms that read the news and make trades automatically. They have relationships with CEOs and board members. They do not trade on instinct or gut feelings(mostly). And they collectively hold roughly 80% of the U.S. stock market.
These institutional traders are the“smart money.” They are on the other side, buying the stocks you sell, and selling you the stocks you want to buy. Kind of creepy, but let’s not get hung up on it.
“Everyone has a circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.”—Warren Buffet, grandaddy investor
If you’re a new investor, your circle of competence is teeny tiny. It’s about as big as a dot on the head of a pin. How could it be any other way? You wouldn’t decide one day that you’re going to start knitting and immediately flex on your Nana by saying,“Nana, I bet I can knit better than you and also I’m tired of writing thank you cards when you send me $20,” would you? It’s the exact same with investing(minus the rude comment about the thank you’s).
What am I getting at here?
Individual investors who come in hot, pick a few stocks, and expect to ride into a profitable sunset are fighting an uphill battle. There is a reason so few people manage to outperform the market over the long term: it’s f*cking hard! Simple as that. If it weren’t there wouldn’t be a multi-billion dollar industry built around it. And if experts, supported by an army of Ph.D.s with millions of dollars in supplemental resources and technology, have a hard time doing it… do you really think your ice-cold, killer instincts will do better?
So what’s the dumb money to do?
Trying to beat the market is a losing game for the average investor. Fortunately you don’t have to play it! The simple strategy for a fresh, young investor breaks down to three main points:
understand what you can afford to invest
use tax-advantaged accounts first
buy and hold index funds and ETFs to invest in big chunks of the market
This combination will naturally reduce your risk, your tax burden, and the emotional angst that less experienced investors feel in the early stages of their investing journey.
I’ll admit, there was a good bit of jargon in this post
And I kind of left you with a cliff hanger(what are index funds and ETFs?? How do I invest in them!!???? Sorry). If you want to know exactly what all that stuff means, hit the‘Sign Up’ button up top and get started the right way. We break it down into simple terms, then break those terms down two more times, then finish the whole thing off with a drizzle of balsamic reduction and some fresh cracked pepper. Just how Alison Roman taught us.