A noob's plan + some questions.

[zb3]

I was lucky enough in my early investing career to read a motivational book that gave the advice to "start with the end in mind". So I spent a good amount of time imagining what my "end game" portfolio would look like. I knew I wanted financial freedom, and I knew I wanted to build a stock portfolio of great businesses that would pay me enough dividend income that would exceed the salary of the professional middle-management job that I aspired to have at the time.

And I wanted all this before I was 30. It ended up taking me an extra 15 years before I reached my goal, but better late than never.

Today, when I open up a new stock position in a company, my intention would be for a position no less than $30K (USD or AUD), but preferably $50K. However, I will scale in to a position if I'm not 100% confident that the stock won't fall in price. I'd look to scale in at increments of $10K over a period of 6 months. It's similar to dollar-cost averaging.

You have to realise that's what I do today, and I hold about 30 stock positions which is at very the upper limit of what I can monitor and keep track of.

When I first started, I was living in Europe and I was able to set up a brokerage account in the US of A. that was back in the day when I had to physically ring a broker (I had a Bank of America account) to order shares. I could only keep track of the share price by looking at the Wall Street Journal every morning. I started with USD $5,000 and I opened 2 positions of around $2,500 each in Bristol Myers (BMY) and Worldcom (WCOM). Brokerage was sometime like USD $70 a purchase back then, so I effectively paid 2.8% brokerage on each position.

Yes, you heard it. I owned stock in the infamous Worldcom (I'm wondering whether you are too young to know about this fiasco of a company). At the time I thought, I only have $5,000 and surely I can't go wrong owning a blue-chip Pharmaceutical and Telecom company. I have my first ever monthly brokerage statement (that includes my position in Worldcom) framed and hanging on my home study wall.

I didn't care that brokerage was expensive for the small amount of money I had to invest, it was more important to get some "skin in the game". Learn how it feels to have a fractional ownership in a business, and learn how it feels to experience stock price gyrations and volatility. It was the best decision I made in my life. I was hooked.

I you feel that you would like to own your own portfolio of stocks, get some skin in the game early on. So I think it's absolutely worth spending even less than $5K to buy 1 or 2 positions in some companies you feel that you would like to own directly. Learn how it feels when you have paper losses and learn how it feels when one of your picks becomes a 10 bagger. Don't fret that you are paying a higher percentage of brokerage when you open small positions, what is more important is the fact that you have positions. In 10 or 20 years time, you won't even think about the brokerage that you paid.

I only used managed funds to get exposure to asset classes or regions that I'm not interested in learning or tracking myself. The other reason I owned managed funds was to get commentary from a fund manager who I thought was super-intelligent and I could learn from. Kerr Neilson's Platinum Asset Management was a listed fund that I took an AUD $5,000 position just to get his commentaries. Not only did that position outperform my own portfolio over a period of about 10 years, I learnt a lot about investing to boot.

Thanks again for your input. I suppose I dollar cost average at the moment by contributing money to my managed funds each week, but at such small amounts it doesn't do much difference. I was thinking of creating a fictional portfolio on NZX and tracking that rather than putting in 5k or so in a few shares. I am the type of person that likes to fully know what I am doing before starting something. Then again you do learn a lot from practical application but i feel I should read a few books first before investing any of my own real money. Ideally I would like to have 8 or so stocks with at least 10k each invested. I feel that that is enough diversification but will also provide great returns.

[zb3]

First of all, what company pays that much to a Grad. Even if you are living on nothing, $1k per week is over $70k pa before tax. (serious question as things must have changed since my day).

Personally I would not purchase property unless you are really keen to do so. In a few years time, you may decide to go overseas etc so a share portfolio is much easier to manage.

Based on no property, cashing in the managed funds and $1kpw, look to open positions in the $5-$10k range, as you get diversified, start adding to the good positions (sometimes the best company to buy is the one you already own).

You will make mistakes - identify them quickly and learn from them. My biggest mistake is I never sold. I have recently got rid of the losers, and the ones I didn't beleive in. Even selling some were a mistake but I feel it is better to hold only stocks I like, than stocks that I dont on the off chance they do better.

You are right - I wish i was earning 1k a week just on my own. I will be investing on behalf of my brother too so only half of that will actually be mine. That is a good point about property although I do not see myself leaving NZ in the immediate future for any extended period of time. I feel investing in property as well as shares would lower the risk of losses.

I guess the main thing I want to find out is do self managed portfolios really outperform managed funds? Surely any out performance most only come from a well read invested with a lot of experience and decent $$$ to invest? I feel I would be financially better off if I stayed in managed funds for at least 2 years until I build up a good amount of knowledge and a decent amount of capital?

I'm curious to know how many of you are seeing returns that are consistently higher than 12%pa? How many years of experience did this take to achieve?

[zb3]

The ability to control your emotions, to not become emotionally invested (pun intended) in your stock decisions, to admit to mistakes (and do it quickly), to accept contrary information to your beliefs, to act against your mental bias - these are the skills that separate good traders/investors from those who will go broke. It takes years to master this self control - maybe even a decade or two. You only have to read a few of the more popular threads on ST to see how wedded some posters are in their beliefs about certain stocks even in the face of spiralling losses. Put the following author on your must read list - Dr Alexander Elder (a psychiatrist who writes about the psychology of trading). One of the major benefits of technical analysis is that it removes much of the emotional bias from your decision making, so developing TA skills is highly recommended.

Those are some good points. I will add that author to my reading list.

[zb3]

A slightly different take: Don't forget also that money isn't everything. It seems you are very very focussed on making money as fast as possible and I fear you might be forgetting to live your life? Many of the happiest people I know don't have a bunch of money and the reason is their life is focussed most on the things that make them happy; family, friends, relationships, travelling the world, learning about other people, other places, other cultures. Are you going to be able to experience all the things you want to in your 20s if you are saving $1k per week? Just a thought. Good luck with everything mate!

Good point. I guess life goes by in the blink of an eye and at the end of it all I do want to say that I've enjoyed it. It's only the last year or two that I have become so money focussed. Before that I wasted so much of it without a care in the world - and that I really do regret. My thinking is that my age is really the make or break point in my life. If you make good financial decisions now you will be set up for life, but if you don't you will pay for it. I see so many people that are renting in their 30's and struggling to get by. I just don't want that to be me. I feel that I have wasted enough money over the last few years and now it is time to seriously save for at least a few years and then I will plan on enjoying my money a bit more. Thanks for your input though, money definitely isn't everything.

[Harvey Specter]

A few points:

RE me saying no to Property - one property is not diversification. Say you have a $500k house, $50k in share and a $450k loan - why would you put 10 times as much in property as you would in shares. Also, with only one property you dont have the right systems set up. its different if you are aiming to get 10+ as you sort out a more efficient re-tenanting process, refurbishing, trades men etc, agent connnections for buying, etc.

20's being the make or break stage in your life - NO. As far as your career yes but not financially. Make sure you get a good job, dont go into debt and you will be ok, I promise you. Sure if you save $1000pw from 20, you will be better of than if you save $1000pw from when you are 30. But $1000 when you are 20 is huge (impossible), and will effect you lifestyle. Get your career right and you could be saving $3k, $4k, or even $5k pw.

[steve fleming]

The great thing about the market, as Boring said, is that there is a lot of different ways of making money from it.

However, in my view, like any business, if you want to be very successful, you have to find a style/ approach (or approaches) that gives you a 'competitive advantage' in the market. Your 'competitive advantage' is likely a function of your personality/temperament and interests, your life experiences, your skillset and investment education; and will allow you to consistently outperform the market. The market, like any other, can be ruthless and dangerous. If you think of what makes a successful business (i.e. being a leader not a follower, good vision, identifies opportunities ahead of the market, strong systems and procedures, doest panic in a crisis) and think about how you can apply that to your investment/trading style.

IF you don't have a competitive advantage, then, again like any other business, over the long term, you will most likely not out perform and you may as well keep your money in managed investments or elsewhere.

The market is such a big place (esp the ASX with over 2000 stocks), and takes such a long time to master, that if you are all over the place, doing a bit of momentum trading here, technical trading there, blue chip investing here, yield investing there, then you'll spread yourself too thin.

The best investors I know (over the longer term) are the ones that focus on a niche (whether that be technical trading only ASX 50 stocks, fundamental investment based on strictly defined metrics) and concentrate on the niche. Through years of research and experience they pretty much know everything about their particular niche, giving them a huge information advantage over someone who does the occasional trade.

IMO books are OK,but nothing beats the practical experience of being in the market, getting an idea of relative value and seeing how stocks react to announcements. Theory is good, but never lose sight of the big picture (i.e. there is no point wasting time trying to forecast 10 years worth of earnings if the company themselves can't even forecast 6 months ahead).

Get it right and you can make seriously large amounts of money (even from a small base) over a 5 to 10 year period. Get it wrong and you can lose everything.

Good luck!

[BIRMANBOY]

Just to further add to the array of opinions that always get pushed out there as a result of this type of question......here's one more option. Investment doesn't necessarily just mean, property, shares, funds and bonds. The best investment (in my opinion) you can make is firstly in yourself so that means making sure you maximize your earning potential going forward by either advanced education or vocational training. As someone said earlier saving 1000 per week is nothing if you set the basis for saving 5000 per week. Its all about return on capital and how and where you put the capital will determine your return. So if you ask yourself this question. Where will I get my best return, short term, long term and what are the risk profiles and also what is the probability of that return being realized. The share market, is, if we are honest outside of our control. Doesn't matter how much you study, how much experience you have you are always going to be subject to the momentum that everyone else creates....doesn't matter how right you may be if a majority of other investors disagree or don't know...they are the ones that control the way things go. Trying to be on the right side of this momentum all the time is doomed to failure. The point I am getting at here is there is another possible investment that you can make that is more controllable and that is not as subject to circumstances outside of your control. Starting your own business can be hard work and is not for the faint hearted but can return a much better return than the share market. It can also provide benefits such as providing employment to others, allowing a more flexible work/life balance and also provide income after you stop working if structured correctly. The great thing about your own business is its ability to be scaled based on your finances/circumstances. So for example a friend of mine started his own business doing electrical work in the evenings and weekends and kept his regular job. Gradually built up equipment, clients and expertise until he was ready to go out on his own.

[JBmurc]

Good point. I guess life goes by in the blink of an eye and at the end of it all I do want to say that I've enjoyed it. It's only the last year or two that I have become so money focussed. Before that I wasted so much of it without a care in the world - and that I really do regret. My thinking is that my age is really the make or break point in my life. If you make good financial decisions now you will be set up for life, but if you don't you will pay for it. I see so many people that are renting in their 30's and struggling to get by. I just don't want that to be me. I feel that I have wasted enough money over the last few years and now it is time to seriously save for at least a few years and then I will plan on enjoying my money a bit more. Thanks for your input though, money definitely isn't everything.

Too true hit me round 24-25 years old ...took some major risks in my late 20's....now 35 with a Family , home debt ---- makes it much harder ..best to wise up when your young and free ...still have a goal of being Financial free of debt with a good sized passive cash-flow--- all depends on how well you want to be
set-up ....a person that is happy as a hermit living in country no-where town living on own food-- low luxuries would be set say on 600k ( 40-50k house,, 500k mix high-yeild investments 8% av 33k cash p.a,, 50k misc. car/bike)

[Buffett Jr]

The ability to control your emotions, to not become emotionally invested (pun intended) in your stock decisions, to admit to mistakes (and do it quickly), to accept contrary information to your beliefs, to act against your mental bias - these are the skills that separate good traders/investors from those who will go broke. It takes years to master this self control - maybe even a decade or two. You only have to read a few of the more popular threads on ST to see how wedded some posters are in their beliefs about certain stocks even in the face of spiralling losses. Put the following author on your must read list - Dr Alexander Elder (a psychiatrist who writes about the psychology of trading). One of the major benefits of technical analysis is that it removes much of the emotional bias from your decision making, so developing TA skills is highly recommended.

Did you go to an AA meeting like he suggests?