How To Invest Your First $100! (7 Ways To Grow Your Money)

Investing Simple is affiliated with Fundrise, Betterment, M1 Finance and Lending Club. This relationship does not influence our opinion of these platforms.

You have a crisp $100 bill in your hand and you have two choices. First of all, you could be like most people and spend that money. Or, you could invest it!

Most people do not realize that there are a number of investments out there that you can get started with that do not require thousands of dollars. We are going to be covering a number of different ways you can start investing with as little as $100.

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$100 Bill, Wikipedia

In the past, investing was reserved for people who had thousands if not tens of thousands of dollars on hand. If you go into the office of a financial advisor and tell them that you want to invest $100, they will probably politely give you the boot! The reason for this is because these advisors make a commission off of what you have invested with them, typically around 1%. If you invest $100 with them, they stand to make about $1! It is simply not worth it.

But what about an online brokerage account? The good news is the options have gotten a lot better. When I opened my first trading account, I had to deposit a minimum of $500 and pay a commission of $6.95 per trade. Today, there are countless options for investing that require a minimum balance of $100 or less with little to no commission costs!

The reason behind this is technology. Thanks to modern day technology, automation and paperless communication, the cost of investing has been drastically reduced. This means better options for you and that $100 in your hand!

But is it actually worth it to invest $100? You could have a night out with some friends, go out on a movie date or buy a new gold club. What is the point of investing such a small amount of money?

As soon as you begin investing, you have made a decision. You have transitioned from someone who is living day to day to someone who is planning and preparing for tomorrow. What you are planning for is different for everyone. It could be a home purchase, an education, a new car or simply making sure mom doesn’t have to worry in her later years. The point is, you started. The amount does not matter, the action does.

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Warren Buffet Caricature, Flickr

Let me share with you a story about Warren Buffett. He is arguably the most successful investor of our time with a net worth approaching $100 billion. There is a story about how Buffett was riding an elevator and he noticed a penny on the floor. He was on the elevator with a few other people, but he was the only one that noticed the coin. When the elevator doors opened, everyone walked off except for Warren Buffett. He kneeled down to pick up the penny on the floor while the others watched. As he walked past the others, he muttered “the beginning of the next billion.”

Warren Buffett is the last person in the world who needs to pick up change off the ground, but that does not stop him. He understands that it is the action and the principle behind it that counts, not the amount of money. Just like this story with Warren Buffett, the action of starting to invest is far more significant than the amount you invest.

Recently, we wrote a piece on Warren Buffett about how he invests and how you too can invest like him. You can read it here.

So, let’s get the ball rolling and figure out how you can invest your first $100!

1. Robo Advisor Modern Investing

Remember that financial advisor we mentioned above? If you went into his office with $100 he would send you away. Today, there is an entirely new form of advisor known as the robo advisor. This is an algorithm based investing platform where your money is invested based on your goals and current situation. Instead of having a human do this, it is handled by technology!

The result? A seriously inexpensive financial advisor that doesn’t need thousands of your hard earned dollars to get started.

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Betterment Robo Advisor

Take Betterment for example. This is the most popular robo advisor out there. While most financial advisors charge an asset management fee of around 1%, Betterment charges just 0.25%. Since Betterment is algorithm based, you can invest with any amount you have! Thats right, no minimum balance.

If you invest with a financial advisor, it would take them a few hours to have a discussion with you and set up an investment account for you. If they are going to make $1 off you, that is just not worth it! If they took on small clients like this, they would not be in business for very long.

Betterment on the other hand can easily afford to work with you. Betterment doesn’t have any physical brick and mortar locations, and everything is 100% automated. It does not cost them any more money to take you on as a client!

When you invest with a robo advisor, this is a 100% passive method of investing. You simply open an account, answer a few questions about your goals and your current situation and fund the account. After that, you are done! You will not think about this investment until tax season or if you choose to contribute more money.

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Betterment Sign Up Process

Your robo advisor will automatically rebalance and reallocate your portfolio. If you are investing for retirement, the closer you get to the retirement date the more conservative your investing strategy should be. Your robo advisor will me shifting more of your money into conservative investments as time goes on.

You will be able to have professional management of your money without having tens of thousands of dollars to invest and paying fees of 1% or more.

If you are brand new to investing and you don’t want to pick individual stocks or funds, a robo advisor like Betterment is a great option. You will have professional oversight of your money without paying a boat load of fees. If you want to pick your own investments, keep reading!

Click here to get started with Betterment!

2. Pick Your Own Stocks

Are you looking to be more active with your investments? If so, another option for investing is to pick some individual stocks or funds. This can be one of the most exciting ways to invest, but we recommend doing some research first!

Here is our free guide on investing in the stock market as a beginner.

In the past, your options for investing in individual stocks were the in person stock broker or the online discount broker. Your in person broker was someone you would call on the phone to make trades on your behalf. This was an expensive way to trade, with commission costs of $10 or more per trade common.

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Amazon Stock, August 14th 2018

This method of trading was largely phased out by the online discount broker. These services would offer an online trading platform and by cutting out the human involvement, commission costs were lower. My first brokerage account was an online discount broker, and I would pay a commission of $6.95 per trade. On top of that, as I mentioned the minimum to get started was a whopping $500!

The reason why I am telling you about this is so you appreciate the array of great options you have today! Just a few years have resulted in some major changes in the brokerage industry.

Thanks to paperless communication, technology and high frequency trading platforms, there are now an array of free investing platforms out there. Two of the most popular platforms are M1 Finance and Robinhood.

Here is our full review of M1 Finance.

Both of these platforms allow you to invest in stocks and ETFs traded on the major stock exchanges for free. Robinhood has a minimum account balance of $0 and M1 Finance has a minimum balance of $100. There are a number of differences between these two platforms that we discussed here.

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M1 Finance Investing Platform

To summarize them, Robinhood only allows you to buy whole shares while M1 Finance allows you to buy fractional shares. If you wanted to invest $100 in Amazon stock, you would only be able to do that through M1 Finance due to the share price. Second, M1 Finance allows you to automate your entire portfolio as well as dividend reinvestment. Unfortunately, Robinhood lacks these automation features. Third, retirement accounts are offered through M1 Finance and not Robinhood. And finally, M1 Finance offers some expert built portfolios you can invest in for free. With Robinhood, you are on your own when it comes to building your portfolio.

Most people will find that the features M1 Finance offers make this a superior platform to Robinhood. Stocks are a long term investment, and M1 Finance has a platform that is better suited for this.

Click here to get started with M1 Finance! 

3. Invest In A Business

Watch out! If your friends approach you about a business opportunity, do your research on it. If this business requires you to buy a starter package, pay for your own website or buy inventory, it might be a multi level marketing business. While most of these are perfectly legal, they often require you to leverage your personal network of friends and family. There are probably better opportunities out there!

So, aside from selling tupperware and candles to your friends on Facebook, what businesses could you start with $100? The answer is quite a few! Here is a list:

  • Bucket + Sponge + Soap = Car Wash Business
  • Blog/YouTube Channel
  • Rent a truck for a day for a Junk Removal Business
  • Photography/Videography
  • Tutoring
  • Ride Sharing
  • Child Care
  • Social Media Marketing
  • Window Cleaning
  • Resume Writing
  • Vacation/Event Planner

Looking for more ideas? Here is our list of 50.

4. Invest In An FDIC Insured CD

If you are totally afraid of risk, you could invest in a certificate of deposit through your bank. Most of these bank investments have a minimum deposit amount and time threshold, but you could find one that has a minimum of $100 or less. The first certificate of deposit that I opened was a $500 deposit. This was a 12 month CD that renewed annually and the purpose of this CD was to secure a line of credit I had with the bank. At the time, I was 18 and I needed to establish credit. I was offered a $500 line of credit from the bank if I backed it with a certificate of deposit. I earned an interest rate of 0.5% on that short term CD, meaning I was earning $2.50 per year.

For most people, the returns from a CD are not what they are looking for. The purpose of a CD is to earn interest that is a little better than what you would earn from a checking or savings account. Bank CD’s are FDIC Insured for up to $250,000 meaning there is no way that you could lose money by investing in one.

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Bank CD Rates Ad, First United Bank

If you are a young person and you do not need the money you are investing in the short term, you should probably look beyond the bank CD. The interest you are receiving will not outpace inflation and you will be losing the buying power of your money.

Recently, a new bank opened nearby where I live. To get people in the door, they were offering a number of CD’s with great rates. The best one was a 48 month CD. The minimum balance to open it was $25,000 and the interest rate was a guaranteed 3% per year. This would be a great investment for someone who was saving for college or a major life purchase. You would not want to invest that money in the stock market as stocks are volatile and higher risk. Instead of leaving that money in the bank earning very little interest, a certificate of deposit is a great option.

5. Peer To Peer Lending

Have you ever loaned your friend some money and later on he paid you back with some interest? You gave your friend a personal loan! Traditionally, this type of investment has been reserved for the banks. Recently, a number of platforms have surfaced that allow you to loan your money to others just like the banks do! One of the most popular platforms for this is Lending Club.

These peer to peer lending platforms allow you to either lend or borrow money. Borrowers will pay interest to lenders based on a number of factors such as credit score, income and borrowing history. With Lending Club, you can invest in loans for personal reasons, medical bills, auto refinancing and even small business loans! You can purchase fractions of a loan called a note with as little as $25. Most people who have had success with peer to peer lending have suggested investing in at least 100 notes to be adequately diversified.

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Lending Club Peer To Peer Lending

These peer to peer lending platforms have a dashboard where you can screen loans and pick them individually. If you have a greater risk appetite, you can find higher risk loans that will pay a higher return. If you are more conservative, you can invest in only the safest loans from the low risk borrowers. If you don’t want to pick loans individually, you can invest in a preselected collection or portfolio of loans!

Peer to peer lending allows you to access an asset that was traditionally reserved for the banks! Now, you can be the bank.

Click here to get started with Lending Club!

6. Invest In Yourself

This is probably not an option you want to follow, but at least consider it! There are a number of small investments you can make in yourself that can generate huge returns in the long run. Here is a list:

  • Invest in a professional resume edit and review
  • Invest in new job interview clothes
  • Invest in books (or read at the library for free!)
  • Learn a new skill though an online course
  • Find someone you look up to and take them out for lunch
  • Invest in a gym membership for your health
  • Find continuing education classes at your local school

Often times, when it comes to a job interview the first impression is what matters. Something as simple as a fresh haircut and a new shirt and tie could put you ahead of the other candidates. If a $100 investment in your looks means you get the job, that is well worth it!

7. Invest In Crowdfunded Real Estate

One of the most exciting investments that has recently emerged is crowdfunded real estate investing. Platforms like Fundrise allow you to pool your money with other investors to invest in real estate projects.

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Fundrise Logo

I am sure we all have that rich friend or family member that made a fortune by investing in real estate. Typically, this is through buying multifamily properties and renting them out. While this can be a great investment, there is one problem with this. It is really difficult to get started! If you want to buy a piece of real estate, get ready to put down as much as 25% of the total price of the property, not including closing costs!

Here is our full review of Fundrise.

Thanks to crowdfunded real estate platforms, you can now invest in real estate projects with other people without shelling out thousands of dollars! It is a lot easier to get started. Real estate is one of the most popular investments out there, and you are able to make money while providing much needed housing to other people. This type of real estate investment is 100% passive, meaning you will not have to do anything after you invest! If you buy a piece of real estate to rent out to someone else, that is going to be a very active income source. You will be getting calls at all hours of the day, and night! On top of that, if your tenant does not pay rent you will have to evict them! This is a very time consuming process and you will not be making any money from that unit during that time.

With crowdfunded real estate investments, you own a small piece of hundreds or thousands of different properties! You won’t have to worry about vacancies or evictions.

Click here to get started with Fundrise!

How NOT To Invest Your First $100

What you do with your money is up to you! You might decide to follow one of the strategies listed above or continue searching. The last thing I want to do is cover a few things that you probably should not do with your $100 investment. Most people who do these things end up losing most if not all of the money. We want you to have the best chance at success!

  1. Avoid investing in penny stocks. While they may appear cheap, they are often cheap for a reason. If you are going to invest in individual stocks, stick to those listed on the NYSE or NASDAQ.
  2. As mentioned earlier, watch out for multi level marketing opportunities. This typically requires you to pester your friends and family to buy products from you. Consider this, if it is such a great opportunity why is someone telling you about it?
  3. These days, there are a lot of people running ads on Facebook and YouTube. Some of these ads include attractive people and sports cars. As I am sure you know, not everything on the internet is true! Watch out for these ads trying to sell you a course or training. While online courses can be extremely helpful, don’t just buy one because you think it will get you behind the wheel of a Lamborghini!
  4. Don’t waste your money on gambling. Lottery tickets are an optional tax that you do not have to pay! The odds are against you when it comes to lottery tickets.
  5. Do not use that $100 as a down payment. You might be tempted to put $100 down on a new toy, but all you will be doing is putting yourself in debt. Car dealers often advertise deals where you can drive a brand new car with $100 down or less. This is not an investment! You will be buying a depreciating asset and going into debt.

 

Fundrise Fee Structure: Are There Any Hidden Fees?

Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.

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Fundrise Logo

Fundrise is an online real estate investing platform that gives investors the opportunity to invest in private real estate with as little as $500. One of the reasons why Fundrise has become so popular is because of the low fee structure.

In case you missed it, here is our full review of Fundrise.

Compared to traditional real estate investments, fees are significantly lower on the Fundrise platform. Fundrise charges an annual fee of 1% of your investment. In this article, we will be explaining what this fee is and whether or not there are any hidden fees that you should know about.

Fundrise Fees Explained

Fundrise charges a fee of 1% per year. They do not charge any other hidden fees and there is no front end load fee with Fundrise.

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Fundrise Fees vs Traditional Investment Fees

This 1% all in fee is broken up into two individual fees.

The first is the asset management fee. This fee goes toward the management and oversight of real estate investments as well as the normal business expenses incurred. The asset management fee is 0.85% annually.

The second is the investment advisor fee. This fee pays for the online investing platform, reporting and other administrative fees related to investing in Fundrise. The investment advisor fee is 0.15% annually.

The Fundrise eREITs and eFunds do not carry any fees. Traditionally, when you invest in a publicly traded REIT you pay management fees indicated by the expense ratio. For example, the Vanguard Real Estate Index Fund has an expense ratio of 0.26% to cover management of the fund. Fundrise does not charge any additional expense ratio.

Fundrise vs. Traditional REIT Investment

Fundrise allows you to invest through two financial instruments that they invented; the eREIT and the eFund. The short explanation of these investments is that they are non traded, meaning they are not available on a public exchange like a traditional publicly traded REIT. The eREIT and eFund are also investments you purchase directly from Fundrise. This cuts out the middleman and reduces the overall fees.

How does the 1% Fundrise fee compare to a traditional REIT?

Many traditional REITs charge a front end load fee. This is a fee paid to the investment institution before a penny is invested. It is not uncommon to pay a front end load fee of 5% or more, meaning only 95% of what you invest ends up in your account. While that may seem insignificant, consider the following example:

$100,000 invested in a REIT

Front end load fee of 5%

Fee = $5,000

There are no front end load fees or large commissions paid to Fundrise to purchase your investment. The only fee is the all in 1% annual fee.

Most investors do not pay attention to commissions and fees. Unfortunately, this can be a detrimental mistake! While these numbers sound small, the compounded fees paid over time can have a huge impact on your overall returns. Traditional brokers often charge significant commissions, sometimes as high as 8% depending on the investment institution. As mentioned, with Fundrise there are no commissions or hidden fees. This allows you to keep more of your money invested and earn greater returns.

Fundrise vs. Vanguard REIT

If you have done your research, you have come across the Vanguard Real Estate Index Fund. This is a low fee REIT that gives you exposure to a diversified collection of real estate. This REIT has an expense ratio of 0.26% compared to the 1% fee associated with Fundrise. Is this Vanguard REIT a better investment? Let’s take a look at the performance of these investments over the last four years.

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Fundrise Historical Performance
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Vanguard Real Estate Index Fund Historical Performance

In 2014, the Vanguard REIT significantly outperformed Fundrise. However, each year thereafter Fundrise has had significantly better performance than the Vanguard REIT.

One con with investing with Fundrise mentioned in our full review is the limited operating history. We only have four years of returns to go off of, and that is not a large sample size. It is certainly possible that Fundrise will continue to outperform the Vanguard REIT, but returns are never guaranteed.

It is important to understand the difference between Fundrise and other publicly traded real estate investments like this Vanguard REIT. Fundrise is a unique real estate investment, where most traditional REITs contain real estate that has already been purchased. Fundrise takes a venture capital approach where they are constantly purchasing and selling real estate assets and debt. This unique approach could give Fundrise an edge.

The Verdict

Fees flat out lose investors money. Why start your investment already down 5% because you paid a broker a fat commission?

Traditional Wall Street fees have been sky high for a number of years. It wasn’t until recently that new online investing platforms have taken a foothold, and are competing against giants in the long established brokerage industry.

With Fundrise, the fees are transparent and minimized to save the investor money. You have the ability to earn higher returns because your initial investment is larger due to the fact that there is no front end load fee. There are no other hidden fees with Fundrise aside from the 1% annual fee.

Click here to get started with Fundrise!

7 Ways To Invest Like Warren Buffett Billionaire Investor

Warren Buffett is arguably the most successful investor of our time. Buffett is still the chairman and CEO of Berkshire Hathaway at 88 years old. As of 2018, Warren Buffett has a net worth of $86.7 billion. Buffett is known for being a philanthropist and gives away a lot of his money. Over the last 10 years, this has amounted to more than $27 billion.

Despite being one of the richest people in the world, Buffett is known for being very frugal. He still lives in his Nebraska home that is worth around $650,000 today.

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Warren Buffett’s Home, Wikimedia

Aside from drinking more Coca Cola than most teenagers do, eating Cheetos and reading, Warren Buffett is a stock market investor. Warren Buffett earned most of his money from investing in companies and 99% of his net worth was earned after his 50th birthday.

Millions of stock market investors idolize Warren Buffett, and in this article we will be exploring 7 ways that you can think and invest like billionaire Warren Buffett.

1. Invest in what you know.

Did you hear about Warren Buffett buying weed stocks? Or getting in on the hottest new cryptocurrency to hit the market?

Probably not.

Warren Buffett is known for investing in simple businesses. He invests in what he understands. Cryptocurrencies and weed stocks would fall short of a lot of Buffett’s criteria, but the main point here is that he does not invest in something if he does not understand it. You shouldn’t either!

One of the easiest ways to test your understanding of a company is the elevator pitch. You have 30 seconds (the length of an elevator ride) to explain what that company is doing and why you are investing in it. If you can’t, you don’t understand what you are investing in. You need to be able to understand what the business does and what they are doing to make money. You should be able to identify the competitors, what isolates them from the competition and name their management team (more on that point later).

Warren Buffett does has some favorites. He invests heavily in banking, insurance, consumer staples and utilities. All of these businesses are easy to understand!

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Berkshire Hathaway Largest Holdings, Annual Letter To Shareholders 2017

In the annual letter to shareholders, Berkshire Hathaway discloses the largest positions they have in companies. You can see a common theme here, with Apple being the only stock that sticks out. Despite shying away from technology and still using a flip phone, Buffett has a sizable position in Apple. Buffett invests in Apple stock because he believes they have extraordinary products that have become an essential part of our everyday lives. Beyond Apple, we see investments in financial services, banking, telecommunications, food and beverage, airlines, oil and automotive.

One of the other characteristics of companies that Warren Buffett invests in is durability. Buffett invests in durable time tested businesses. He invests in companies that have been around for decades with experience in all market conditions. If you want to invest like Warren Buffett, consider investing in some durable blue chip stocks. A great place to start is by looking at stocks on the Dow Jones!

2. Understand price versus value.

“Price is what you pay. Value is what you get.” – Warren Buffett

Warren Buffett is a long term value investor. He invests in companies based on the underlying value of the shares. Determining the underlying or intrinsic value of a stock is very difficult, which is why Buffett recommends that most people just invest in low fee index funds.

If you do want to learn about value investing, you should learn from the man who taught Warren Buffett. This was a man by the name of Benjamin Graham, mentor to Warren Buffett. In the book The Intelligent Investor, Benjamin Graham teaches the principles of value investing. Before you run out and buy a copy, be forewarned that this book is over 600 pages long and it was originally published in 1949! Despite the age of this book, the principles are still valuable and relevant.

Here is a book summary you might enjoy.

3. Invest for the long haul.

Warren Buffett is a long term investor. He patiently waits for investment opportunities, and once he buys shares he rarely sells them. Some of Buffett’s investments date back to the 1960’s! Warren Buffett started buying stock in American Express in 1964.

If you want to invest like Warren Buffett, you need to have a long term mindset when it comes to investing. Buffett does not care about what a company or stock is doing in the short term. He focuses on the long term and looks at what companies will have a long term competitive advantage over the next decade or more.

Stocks are a long term investment. The movement of the share price in the short term is unpredictable. Trying to bet on what will happen to a stock in the short term is near impossible. If you want to pick stocks, your best chance of success with that strategy is investing for the long term. Not to mention, you will have a significant tax savings as well holding stocks for the long term.

Capital-Gains-Tax-Rates
Source: www.diffen.com

If an asset is held for one year or less, the capital gain recognized on that investment is considered to be a short term capital gain. This type of capital gain is taxed at the highest rate possible, typically the same rate as your ordinary income tax rate.

If an asset is held for over one year, the capital gain recognized on that investment is considered to be a long term capital gain. This type of capital gain is taxed at a lower tax rate.

4. Be greedy when others are fearful.

Benjamin Graham, mentor to Warren Buffett, once said that the market is a pendulum, forever swinging between optimism and pessimism. Warren Buffett learned a lot from Benjamin Graham. For example, Buffett has said that you should be greedy when others are fearful and fearful when others are greedy. Optimism leads to greed and pessimism leads to fear. Buying from the pessimist means that you are buying stocks when there is fear in the market, or buying low. Selling to optimists means that you are selling stocks when there is optimism or euphoria in the market, or selling high.

MARKET PENDULUM

If you hear everyone talking about a hot stock, it is probably time to sell it. The underlying value of a stock does not change in the short term, only the price does. At some points, the price is high due to greed and feelings of euphoria. At other points, the price is low due to feelings of fear.

Most people make money in the stock market through asset appreciation. You buy shares at a low price and sell them down the road at a higher price. If you want to invest like Warren Buffett, do not buy shares of stocks at all time highs! You do not see Warren Buffett investing in the high flyers of the market because it violates (at least) two of his investing principles; price versus value and being greedy when others are fearful.

Stocks are the only thing people are afraid to buy on sale. If you go to the grocery store and find out Tide laundry detergent is 50% off, you would load up. If Procter & Gamble stock goes on sale, the producer of Tide, people are afraid to buy it! When a company stock goes on sale, you typically have a lot of talking heads on TV telling you to sell. This is actually the time when you would want to buy!

With the stock market, doing what is right often feels wrong. 

If you study Warren Buffett, you will also find that he puts little stock in what Wall Street analysts have to say (pun intended).

“We have long felt that the only value of stock forecasters is to make fortune tellers look good.” – Warren Buffett

You will not find Warren Buffett glued to the TV on a Monday afternoon looking to catch up on the latest market opinions. Buffett is likely reading a book in his office. If you want to invest like Warren Buffett, you need to formulate your own opinion surrounding investments. While there is nothing wrong with having a discussion about stocks you own or are watching, you should not be swayed by the opinions of just anyone.

5. Buy Berkshire Hathaway stock.

One of the easiest ways to invest like Warren Buffett is to invest in his company Berkshire Hathaway. Berkshire Hathaway is a holding company owned by Warren Buffett. From 1965 to 2017, Berkshire Hathaway stock has had a compounded annual gain of 20.9% per year, compared to a 9.9% return from the S&P 500.

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Berkshire Hathaway Class A “BRK.A”

A lot of people are curious about the share price. The reason why Berkshire Hathaway stock trades at a share price of over $300,000 is that this stock has never been split. When the share price becomes out of reach for most retail investors, a company will often split the shares to make the price more accessible. Instead of splitting, Berkshire Hathaway instead offers Class B shares under the symbol BRK.B which currently trades at around $200 per share.

While Berkshire Hathaway has an impressive history of beating the S&P 500, you might not want to invest in this stock. The main reason is one that many large investment funds have as well. The larger a fund becomes, the larger the opportunities they need to find. It is difficult for a company with a market capitalization of over $500 billion and a cash pile of over $100 billion to find new investments. 

Small and mid cap companies are essentially off the table. For Berkshire Hathaway to have a meaningful position in companies these size, they would likely have to own it. This limits investments and acquisitions to just the largest companies out there. For that reason, Buffett has said that it will be more difficult to generate market beating returns going forward.

Another important factor to remember is that Warren Buffett is 88 years old. If you are looking to invest for the long term, you will need a new strategy or leader once Buffett steps down or passes on.

“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” – Chinese Proverb

It is much more valuable to know how to invest on your own instead of simply following the strategy of someone else.

6. Pay attention to the management team.

Warren Buffett spends a lot of time learning about the management team of a company. A good management team is a characteristic of any company Buffett invests in. Buffett looks at how management treats shareholders, employees, customers and even the environment. Above all else, he looks for management to be honest with the shareholders.

Buffet looks at a number of factors including share buybacks, dividends, dividend growth and the overall company reputation. If management is acting responsibly, dividends should be paid on a regular basis with a long history of consistently raising that dividend. Shareholders should also be rewarded through a company sponsored share buyback program.

If you want to invest like Warren Buffett, get to know the management. Read the annual reports, earnings reports, watch interviews and study the career path of the company management team. Do they have an outside hire? Where did they work before?

7. Invest in the two fund portfolio.

If Warren Buffett hadn’t made a career of picking stocks, how would he have invested? Luckily for us, Buffett has answered that question. In a letter to shareholders, he outlined a retirement plan that anyone could implement with ease. It does not involve diligent research and stock picking. It involves investing in two funds.

The first is a low fee S&P 500 index fund.

The second is a short term government bond fund.

That’s it. Warren Buffett recommends investing 90% of your money in the S&P 500 fund and the remaining 10% in a government bond fund. As far as funds go, Warren Buffett recommends Vanguard products for good reason. They are known for having extremely low fees and wonderful financial products.

Vanguard
Vanguard Logo

For the low fee S&P 500 index fund, the Vanguard 500 Fund is an excellent choice. Vanguard also offers bond funds. A suitable choice would be the Vanguard Short Term Treasury Fund.

Instead of trying to beat the market, Buffett believes the average investor should own the entire market. It is important to remember that this portfolio is very broad and it is not specific to any persons individual needs. If you are looking for a long term investing plan, you should consider speaking with a financial advisor.

If you want to pick stocks and invest like Warren Buffett, follow these strategies! If you want to follow Warren Buffett’s investment advice, go for the two fund portfolio. At the end of the day, the most important thing is that you are investing!

 

A Beginner’s Guide To Fundrise Real Estate Investing Platform!

Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.

Fundrise is a new investing platform that allows everyday investors to invest in private real estate projects traditionally reserved for the high net worth investors. For the first time, you can invest in private real estate investments with as little as $500 through Fundrise.

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Fundrise Logo

We did a comprehensive review of Fundrise, you can read it here. 

Getting started with Fundrise can be a bit complicated! We created this beginner’s guide to help you get started today.

Step 1: Open a Fundrise Account!

Start off by opening a Fundrise account here. 

You can fund the account and decide on what plan best fits your needs later on!

Fundrise has the entire application process online where they will guide you through a series of questions to create your account. Currently, Fundrise is only offered to US residents age 18 or above. The minimum to get started with Fundrise is $500, or $1,000 for the advanced investment plans. Fundrise charges an annual fee of just 1%. 

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Fundrise Questionaire

Step 2: Decide on an Investment Plan!

Next, decide what Fundrise plan is best for you.

Fundrise gives you the option to choose from multiple investment plans based on your investment objective. Each portfolio offered by Fundrise will comprise of a blend of eREITs and eFunds created by Fundrise.

If you invest $500, you will automatically be placed in the Starter Plan. If you invest $1,000 or more, you can choose between three Advanced Plans.

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Starter Plan vs Advanced Plans

Starter Portfolio: This portfolio is designed for new investors who would like to give Fundrise a shot. The minimum account requirement is only $500 to begin investing. This portfolio consists of 50% growth and 50% income oriented holdings.

Supplemental Income: This portfolio is geared towards income producing real estate. Investors will earn returns primarily through dividends and appreciation of the underlying holdings. Dividends are generated through rental and interest payments in proportion to your share of of the fund.

Balanced Investing: This portfolio offers a balance of 50% growth and 50% income oriented investments. The balanced investing portfolio invests in a blend of eREITs and eFunds offered by Fundrise. The goal for this portfolio is for a balance of income and growth producing real estate.

Long Term Growth: The goal of this portfolio is to generate returns primarily from asset appreciation. This portfolio aims to purchase high growth potential real estate and generate returns mostly from the sale of the underlying properties. This includes buying property and performing renovations in order to sell the asset for a gain later.

Step 3: Fund the account!

You will link your bank account using your online credentials or by manually entering your routing and account numbers. ACH transfers are mandatory for transactions under $25,000. Above $25,000 Fundrise will accept wire transactions.

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Adding Funds To Your Fundrise Account

Step 4: Decide what to do with Dividends!

All distributions or dividends from Fundrise will automatically be deposited into your bank account on file unless you opt in to the dividend reinvestment program. If you want to maximize your returns with Fundrise and allow your dividends to compound, you need to opt in to the dividend reinvestment program or DRIP. Fundrise provides this dividend reinvestment program free of charge as a courtesy for investors.

Compound interest is the effect of earning interest on top of your interest. By reinvesting dividends you are able to earn more dividends because you have a larger investment. Over time, the compounding of these dividends will result in exponential growth of your portfolio.

Fundrise Portfolio
This Fundrise account has Dividend Reinvestment enabled

That’s it! Fundrise is a 100% passive investment. You simply fund the account and put your money to work. Down the road, you can add more funds to this account if you want to increase your investment.

Since Fundrise uses your invested dollars to purchase real estate assets and debt instruments, you are not guaranteed immediate liquidity. All Fundrise investors can obtain liquidity monthly. You must submit a redemption request followed by a 60 day waiting period, which is also subject to limitations. Fundrise is considered a long term investment, their investment team looks for opportunities over a 5 year time span. Anyone looking to invest in Fundrise must understand they may not be able to liquidate their position right away and they should be investing for a minimum time horizon of 5 years.

You will be updated on your investment’s performance through ongoing reports and status updates of your holdings. Fundrise will also send you tax forms at the end of the year for any earnings or dividends received for the prior year. You will also receive emails when new real estate projects are added to your plan!

Click here to get started with Fundrise!

The TRUTH About Forex Trading! (Interview Millionaire Trader Jason Graystone)

In this interview with Jason Graystone, we will be discussing forex trading, dispelling the myths and teaching you everything you need to know about forex trading!

Since starting his first business at 22 years old, Jason Graystone has successfully built and run multi million pound businesses both in the service sector and online. Coming from a working class family with little education, Jason embarked on a journey of self development from an early age which he says played a fundamental part of his success.

Jason believes that if you have the right mindset and adopt the right personality traits, you can use the same formula to achieve anything you want in life; and it’s this attitude that allowed him to achieve financial independence by the time he was 30. Jason believes that everyone deserves to live an inspired life.

“We are better people when we have time to contribute towards what we are passionate about. We can solve meaningful problems and be rewarded and fulfilled at the same time.” – Jason Graystone

This belief is what drives Jason to help others achieve financial independence by educating them on the true secrets of wealth so that they can be liberated from the societal restraints and live the life they deserve. Jason has become globally recognized for his transparent approach to teaching and his ability to transfer knowledge onto his students through integrity, accountability and his tireless contribution.

Investing Simple is affiliated with Tier One Trading by Jason Graystone.

Learn more from Jason Graystone:

Free Forex Training Course

YouTube Channel

The Trading Coach Podcast

$1 Trial Membership Tier One Trading

Interview Transcript:

Ryan Scribner: How’s it going today, guys? Welcome back to The Channel. I’m here in New York City with a man by the name of Jason Graystone. It’s the first time I’ve ever talked to a trader on The Channel here, so it is super exciting.

Ryan Scribner: You’re all the way from London?

Jason Graystone: Yep.

Ryan Scribner: Thanks for taking the plane trip out. I certainly appreciate it.

Jason Graystone: It’s great.

Ryan Scribner: Why don’t you go ahead and start by doing an introduction about yourself, what it is that you do?

Jason Graystone: First of all, thanks for having me on The Channel. It’s a real joy to be out here in New York City.

Ryan Scribner: Aside from the traffic, right?

Jason Graystone: Aside from the traffic, yeah, and the humidity.

Jason Graystone: For those of you who don’t know me, my name is Jason Graystone. I’m a professional currency trader, and I’m also a co founder of a company called Tier One Trading. We specialize in helping people achieve financial independence through speculative strategies in the financial markets. I’m frequently number one author on TradingView.com. I’ve featured in blogs and podcasts. I’m currently writing a book, which will be out later this year. I’m also invited to speak around universities in the UK and take part in research for business development and things like that. I’m really enjoy entrepreneurialism as well as trading, but trading was what allowed me to be financially independent.

Ryan Scribner: Yeah, we were talking about that a little bit off camera. I think it’s super interesting, but for you, trading was a way for you to escape the traditional work environment that you weren’t really a fan of?

Jason Graystone: Absolutely. Trading is something different for everyone. For me, it was a vehicle to get to a point where I just had time. I wanted the time to decide how I spended that time, and it was a way to accelerate my wealth in order to do that. That was my motivation for it.

Ryan Scribner: Yeah, I know that’s one of the most frustrating things, is when you don’t know exactly what it is you want to be doing. You don’t have the time to figure it out, and so I think for a lot of people, maybe they focus on wanting the money, but really it’s more important to figure out why it is that you want that.

Jason Graystone: Absolutely.

Ryan Scribner: That’s really incredible to say, in order to figure out what I really want to do with my life and what really interests you on a natural level, so …

Jason Graystone: For me, the money’s just a byproduct. You need a why, and we’re going to go through that. The reason I wanted to come on this channel is I really resonate with Ryan’s approach, and if you’re familiar with trading at all, you’re going to see that there’s a lot of shit out there, right? I can say shit?

Ryan Scribner: Yeah, that’s perfectly fine.

Jason Graystone: There is a lot of unethical educators. There’s a lot of people selling dreams, false expectations, and people are really falling for this stuff and losing a lot of money. They really are. I lost a lot of money myself. Over the years, I’ve worked with thousands of traders, and I’ve seen a lot of predictable patterns. I’ve seen what works, what doesn’t work, and it is a massive failure rate. It is a massive failure rate.

Ryan Scribner: Yeah, do you have any numbers on that, as far as what it is? I know it’s quite high. In some of the stuff I’ve look at before, it’s most people are unsuccessful with it, right?

Jason Graystone: It’s about 90 percent, yeah.

Ryan Scribner: That’s about what I’ve seen too, about 90 percent are unsuccessful.

Jason Graystone: Yeah, we know that from broker statistics, that about 90 percent of people lose 90 percent of their capital within 90 days, so it’s a 90/90/90 …

Ryan Scribner: Ninety-ninety-ninety. That’s not really a good … although it’s easy to remember, but, yeah. That’s what I’ve heard about trading as well. Obviously, you guys who have watched my channel before know I’m a long-term value-oriented investor. Looking at both of us, we’re kind of polar opposites here, because I’m more focused on the fundamentals of a company, and you’re looking at strictly charts, right?

Jason Graystone: Yeah, absolutely.

Ryan Scribner: You’re looking at currency, so you’re looking at just trading based on patterns, right?

Jason Graystone: Of course. The reason this fits so well is because I was very much a pattern investor. I invested in businesses, stocks, real estate investment trusts and startup businesses as well. Although, take the startup businesses aside, they’re very passive, boring investments. They were long-term. I had an appetite for risk, and I wanted to just accelerate a little bit, so I started exploring speculative markets like options and Forex. I went into Forex, and I blew around 36 to 38 grand initially.

Ryan Scribner: That’s how much you lost? Is that the learning curve that people usually experience, or is that kind of …?

Jason Graystone: I think I made every mistake possible. I followed signals and all of that stuff that I’m going to go through with your listeners. After that I became very good. I learned a lot about what didn’t work, which allowed me to become really good, and I later on realized that it’s actually, you should be focused on what you’re not losing rather than what you’re gaining. If you can just focus on that, you become very good.

Jason Graystone: I went through all the crap … There’s a lot of scams out there. There’s a lot of automated systems, signal services, people selling pipe dreams. Over the years, I’ve been fortunate enough to work with thousands of traders in multiple countries, over 50 different countries. What we’ve seen is, is very predictable patterns in why people fail, because we’ve been analyzing data on the behavior patterns of people, how engaged they are, how accountable they are, what are they watching, what process are they taking, are they going from the start to the finish. Do they skip in? Do they jump in, jumping ahead? Do they actually want it? Have they got realistic expectations?

Jason Graystone: I’ve produced a framework almost that will guarantee your highest probability of success. Obviously, it’s down to you as a trader in the end.

Ryan Scribner: Based on looking at the behaviors of past students and past people who haven’t had a good experience with it?

Jason Graystone: Absolutely. If you follow the framework in this way, which a lot of it is down to psychology, by the way. The skill is the minority, believe it or not.

Ryan Scribner: That’s pretty much the same thing as well with investing in the stock market. It’s the psychology of it, as far as the investing goes and the fundamental analysis, that, based on looking at the numbers and the principles, but it’s a totally different experience actually doing it.

Ryan Scribner: As far as the risk side of it goes, I know you mentioned having that greater risk appetite. I know, personally, I dabbled around with swing trading very early on in my investing career. I can remember I had $500 I was swing trading, and it was keeping me up at night, worrying about it, so I learned early on that I do not have the risk appetite for much of anything beyond what I’m doing now.

Ryan Scribner: How do you know, I guess, when you have that risk appetite? Is it something you just try it out and you find out if you do, or …?

Jason Graystone: Yeah. I think by the time I’d lost 36 grand, it wasn’t just blowing 36 grand in the market. That was a long learning curve. It was over 18 months to two years.

Ryan Scribner: How did you feel about that? Did it make you feel like a bad person, or you just felt like, “Okay, I’m getting there?”

Jason Graystone: I felt frustrated. I did try to look at it as a donation to my education rather than a big loss. At the same time, that’s a lot of money. That can be a life-changing amount of money to lose. Fortunately, I’m a businessman and I’m not stupid, and I would never trade money that I couldn’t afford to lose, but it’s still a lot of money. By the time I’d lost that much, I really felt like I owed it to my family as well.

Ryan Scribner: To do it right at that point, yeah.

Jason Graystone: I was like, “That’s multiple holidays.” I was thinking of all the money that I’d blown. I really just needed to knuckle down and get it done. I knew. You’re so proud as a person. You don’t want to be told that you’re doing things wrong, and then you know, and you just keep doing it. Then by the end of it, you’re like …

Ryan Scribner: There’s no such thing as a free lesson out there. You either pay for it in terms of paying for education, or you make mistakes and you end up losing money.

Jason Graystone: Absolutely.

Ryan Scribner: I have a friend of mine who trades options. He’ll text me sometimes saying he lost 20, 30 grand in a day, but you can tell that it doesn’t affect him. Really, I think what it is, if you feel like less of a person after losing that money, then you probably shouldn’t be involved in something speculative, because it’s just money. It’s a tangible thing, but it doesn’t make or break you as a person. I think a lot of people tie their worthiness to their monetary value, and I think you have to have that separation there to really do something like you’re doing.

Jason Graystone: Absolutely. It’s really important as well before we get into it. I’m going to talk about it in a bit, but it’s really important to build a trading system around your lifestyle and your personality, because if you don’t, you’re essentially doing something that isn’t aligned with your comfort zone, and you’re just not going to succeed. It doesn’t need to be that way. You can build systems around your personality so that you’ve got the best change for success.

Jason Graystone: I’m going to go through a bit of a framework based on all the information and the data that I’ve analyzed over the years. I want to just, before we get right into that, I just want to debunk some myths, because some of your listeners are probably thinking … I get asked all the time, “Isn’t it gambling? Isn’t it risky?”

Ryan Scribner: Sure. I’ve said things about that on The Channel a lot, because, to be honest, I don’t know a lot about the trading side. Really, I don’t know much about it at all.

Jason Graystone: No. Like anything, the markets are the market. They just do what they do. It’s not the market that’s risky. It’s the approach you take to the market that’s risky. If you think about a casino, for instance, you’ve got one-armed bandits, you’ve got poker table, you’ve got Black Jack, you’ve got roulette. The reason the casino comes out on top in the end is because there’s no one who’s consistent. There’s no one with an edge. They just go there, blow some money, they’ve got no strategy, no plan, and they are approaching the casino as a gambler, whereas if you look at the winning poker table, it’s always the same players there, always the same players at the top of the tournament.

Jason Graystone: They’re winning the tournament time and time again, because they’ve got an edge. They’re not approaching the casino as a gambler. They’re approaching the casino as a business. It’s like they’ve got an edge, they’ve got a risk management strategy, a money management strategy, they know when to get in and get out, they know when to stop, and they know when to continue. The markets are exactly the same. The market, you cannot control. It just does what it does, so it can’t be risky. The market can’t be risky. Your approach to the market is what’s risky.

Ryan Scribner: Yeah, that makes sense.

Jason Graystone: Lots of people think that it’s risky gambling, but it’s down to you to approach it professionally as a business for it not to be a risk. We’re looking for an edge, a paper-thin edge.

Ryan Scribner: If you approach it like you would the casino, you’re going to get a similar outcome more than likely, right?

Jason Graystone: Of course. Before we go on, people come to me and say, “I want to be a consistently profitable trader.” Well, the clue’s in the title, right? You have to be consistent.

Ryan Scribner: Not all the time, right? Not every trade?

Jason Graystone: Yeah, absolutely. You just need to show up and do the same thing, same thing. I’m going to go into that in a bit.

Jason Graystone: Secondly, people think that you have to be intelligent, you have to have a high IQ. I came out of school with one grade, and that was aught. It’s just simply not true. If it was true, you would see a lot more brain surgeons ditching their 250-grand job, so earning seven figures trading, because they’re far more intelligent than me, right?

Ryan Scribner: Sure.

Jason Graystone: That’s absolutely not true. The next thing is that people think you need to know about all the global affairs, what’s going on in the country.

Ryan Scribner: Sure, current events and what’s going on in the political landscape and everything.

Jason Graystone: Absolutely. Unemployment rates, bank rates, all of that type of stuff, and that’s not true either. As a technical trader, I’m looking for patterns in the market. I couldn’t care less what’s going on in the world. The market doesn’t affect me. The bank rates don’t affect me. Brexit doesn’t affect me. I’m just looking for a probable edge out of patterns in the market that are predictable. You absolutely don’t need to know about all the global affairs of what’s going on.

Jason Graystone: Lastly on that, people think you need lots of equipment, lots of …

Ryan Scribner: Yeah, I’ve seen the six-computer screens and all kinds of stuff going on, and charts. Do you need all that, or is that just something that helps you, or does it complicate the process?

Jason Graystone: I started trading on a 15-inch laptop. You absolutely don’t need all those screens. Once you get down the road, it’s good to have two screens at least, because … I’m going to go through some equipment I recommend for you guys if you’re looking to start trading. Two is good, because you can have the markets, and you can have something else on another screen if you’re doing other things. You absolutely don’t need six screens. Down the road you might … The reason they have six screens or eight screens is because they’ve got a lot going on. To make it easier, they have different charts and different screens.

Ryan Scribner: Sure.

Jason Graystone: You’re not going to be on Wall Street from day one. You absolutely don’t need tons and tons of equipment.

Ryan Scribner: That’s a myth debunked right there, because that’s something I figured you needed the six computer screens, and I’ve said that in the past.

Ryan Scribner: One thing that was interesting I just wanted to mention, I was looking at one of your videos, and you said there have been times where you go a very long span of time without a trade because the right pattern doesn’t show up for you.

Jason Graystone: That’s right, yes.

Ryan Scribner: What’s the longest span you’ve gone without a trade?

Jason Graystone: There’s a saying that, “You don’t earn money from trading. You earn money from waiting.” It’s absolutely true, although, essentially, it’s trading in the end. Trading requires a lot of patience. One of the other myths is that people think that you always have to be in a trade when you absolutely don’t.

Jason Graystone: What we’re waiting for is a set of rules to play out. Then we know we have a paper-thin edge over the market. The probability of what’s likely to happen next based on that pattern happening provides us with our edge. If we can consistently trade that pattern, that’s how we earn the money. That could be one week. That could be five in a day. That could be once a month. That’s how it goes.

Ryan Scribner: It’s really about the patience.

Jason Graystone: It is about patience.

Ryan Scribner: There’s people who think, similarly, when it comes to investing, they think they need to be all in the market at all times, and if they have any cash, they’re like, “Oh, I’ve got to get this money to work. I got to put it to work.” Then you hear about people going all in with the stock market, investing all their money, and then they have no mobility there. If a deal comes along, they can’t buy anything, because they’re already all in to the market. It’s very similar too, that patience aspect and knowing when to hold them, hold onto your money and say, “Okay, I’m going to wait for a better opportunity,” look for what it is that you’re looking for.

Jason Graystone: Absolutely. Bearing in mind, the purpose of this video is to give you the best possibility of succeeding into trading if that’s something you want to do.

Jason Graystone: The last thing I need to mention on this bit is it’s not, don’t look at it as a get-rich-quick vehicle. If you’re trying to think about how much money you can earn from trading, you’re really missing the elephant in the room. It can be the fastest way to grow your wealth. I’ve invested in businesses. I’ve invested in property. I’ve invested in stocks and shares. This really is the most rapid way to accelerate wealth, but if you’re just chasing the money from day one …

Ryan Scribner: You’re in it for the wrong reasons, yeah.

Jason Graystone: You’re in it for the wrong reasons, which is leading us onto really the first step of the framework. The first, and you’ll know just as well as I am, the first step in the framework, the most important thing, is to actually want it, right? What I mean by that is so many people out there are fantasizing over someone else’s dream. They see someone that’s hit a trade or there’s crap where they’re flying around in rented helicopters and Lambos and the money …

Ryan Scribner: Yeah. I’ve seen it all, yeah.

Jason Graystone: Of course. Of course.

Ryan Scribner: Flashy lifestyle, the kind of in-your-face showing off your rich …

Jason Graystone: Absolutely. What people do is they go, “What are you doing?” They say, “Well, I’m trading.” Then they go, “I want to trade.” Do you want to trade, because, I’m telling you, if you don’t enjoy actually looking at the markets and enjoy solving the puzzle, you’re not going to stick with it, because there’s lots of hard work down the line that you’ve got to put in.

Ryan Scribner: Yeah, people tend to ignore that hard work piece, and they just see, “Oh, this guy’s driving a Lamborghini. I can do that too if I started doing whatever he’s doing.”

Jason Graystone: Yeah. It’s not for everyone. Trading isn’t for everyone.

Ryan Scribner: Do you have to have a natural interest in charts and patterns and puzzle solving, like you were saying?

Jason Graystone: I would say that you have to actually enjoy looking at the markets and coming in each day. You don’t have to look at them all day. You can do day trading, swing trading, which we’ll go through, and you don’t have to spend lots of time in front of the chart, but you do have to have an enjoyment for the psychology in the markets and going through the charts, because there’s lots of back-testing data that you need to accumulate so that you’ve got the psychology to put that into your plan. You have to just actually enjoy doing it.

Jason Graystone: Know that you actually want to trade, because that’s the first thing that’s important, and why, because the monetary value, or the monetary gains from trading, it can be life-changing. I was just with a couple of Wall Street traders, and they said the same thing, it can be life-changing. What’s the money for?

Ryan Scribner: Sure.

Jason Graystone: Because it’s just money.

Ryan Scribner: Right.

Jason Graystone: There’s some kids in the [prop firm 00:17:19], they’re just driven by the money, because they haven’t got that … They’re just out of school. They’re just trying to vector the other person for more money. It doesn’t really mean anything to them. They’re just trying to get more money, because it’s a competition, like a [crosstalk 00:17:32].

Ryan Scribner: See who can have the most money in their bank account, not really, “Why do you want that money?” It was interesting too. You were talking about some of your motivations for doing what it is that you do and wanting to give back to the people around you, and really the more money you have the more good you can do for the world, and the more good you can do for people’s lives.

Jason Graystone: Sure. For me, it’s to free up my time to do what I want to do. As I said to you earlier, I ask people or if people say, “You’re driven by money,” these are the sorts of people that I say, “How much would suit you,” and they say something like, “Half a million or a million or two, that would sort me out.” I think that’s very selfish, because you’re just thinking about you and your immediate family.

Ryan Scribner: Not the people around you or your community or people you could really help.

Jason Graystone: Absolutely. I’m thinking much bigger term. When you can teach someone the realistic expectations and teach, and they get results, that’s life-changing, and there’s not a better feeling than that. Even, like I say, the Wall Street traders that we was with yesterday, even they are going into education, because there’s just so much rubbish out there, it’s important to get the information right, because it’s giving it a really bad name, which you’ve probably seen.

Ryan Scribner: Just to tie in here, in case you guys aren’t sticking around for the whole interview, you have a whole YouTube channel, where you do videos like this, educating people pretty much for free?

Jason Graystone: Yep. Yeah, I’ve got my own YouTube channel. My personal channel is Jason Graystone.

Ryan Scribner: I’ll link that all up into, down in the description below, for you guys too.

Ryan Scribner: In terms of just giving back, that’s one way that you do it as well, just by making videos helping people, showing them the basics.

Jason Graystone: Absolutely. I’ve got a book coming out later this year that you can go and read. We’re going to go through this video, we’re going to go right into the technicals. I’m going to show you actually how to make money in the Forex market. It’s going to be really valuable for your listeners.

Ryan Scribner: If you end up taking a pause from this video, bookmark it and come back to it, because it’s going to be a long one, but a lot of value in this one.

Jason Graystone: It is going to be a long one. There’s going to be a lot to take in. I’m not going to give you everything, because that will be …

Ryan Scribner: That would be a couple days we’d be stuck here, sleeping at some point.

Jason Graystone: It’s going to be a good one.

Jason Graystone: The first step is I went over what was the want and the why. You have to know that you actually want it and why you want it. The second thing is expectations. This is the next problem. People, because of the way it’s advertised on TV or these adverts, people think, they massively overestimate what’s achievable in a short space of time, so the first 12 months, say.

Ryan Scribner: Sure.

Jason Graystone: They think that they’re going to double their account in a month. They think they’re going to be on yachts in a year, and it’s just not realistic.

Ryan Scribner: Not realistic.

Jason Graystone: It’s not realistic. I’ll be very surprised if it takes you less than 12 months to really go through the process and learn properly and have a system that you’ve tested and paper traded even, and then gone out in the markets. I’ll be very, very surprised. Then because of that, when they actually start doing it, they figure out it’s quite hard. They blow a load of money, and then what they do then is they underestimate what’s achievable from 12 months to 24 months, say. That’s when the results can really, really compound and you see exponential growth. People get turned away by that.

Jason Graystone: What I’m going to do is just give you some expectations. It’s going to take you around 12 months to really, really learn. Then after that, the money, if you can just go through and go through the process in the right way, the money just comes.

Ryan Scribner: In that 12 months, how many hours a week or a day are we talking about here?

Jason Graystone: It depends what type of trader you’re going to be, and I’m going to go through that in a bit more detail, but you can do anything from, the testing is what takes the most time. The testing is what takes the most time, because you’re essentially testing a strategy back in time, and that can take, you want to go back about five years. That can take a long, long time, depending on how many markets you’re going to be looking to trade. That’s the most time-consuming and the most grueling bit, and I’ll go through the process of that.

Jason Graystone: The next thing is, people just going through it not really knowing the numbers, so they don’t know what they’re going for. It’s like, they’re just trading, “Am I going to replace my income or I’m not going to replace my income. What am I doing with the money?” There’s a very, very simple formula. You talk a lot about stock market investing and passive income, building passive income streams.

Jason Graystone: Essentially, if you’ve got any sort of liquid assets, like money in funds, you’ve got some cash, a cash buffer, some savings, anything like that, essentially, all you’re doing is you’re taking that, and you’re working out your expenses for the month, and you just want to minus your trading income divided by your assets, and that is essentially it. What that will give you is a figure in time.

Jason Graystone: If you’re getting paid monthly, say, for instance, you’ve got $5,000 in assets or cash, and your expenses are $2,000 a month, say. If you’re bringing in $1,000 in trading income per month, then if you do the math on that, the 5,000 divided by the 2,000 minus 1,000, which the calculation is here, you’re going to have five months. You can buy five months. You’ve got financial independence for five months.

Ryan Scribner: Okay, I see what you mean.

Jason Graystone: You’ve replaced your income for five months.

Ryan Scribner: I’ve never really thought about it that way. That’s very interesting.

Jason Graystone: Right. This is what I was working from from day one, when I was 26.

Ryan Scribner: Your whole goal was to free up your time?

Jason Graystone: Yeah.

Ryan Scribner: By generating this income?

Jason Graystone: Absolutely. By having that sum, I put this down when I was 26 years old, and by having that sum in place, I knew what it was going for. It wasn’t just a dream. It wasn’t just a …

Ryan Scribner: It was a tangible number, what you were reaching for, not just some pipe dream, like a Lamborghini or a million dollars out of nowhere.

Jason Graystone: Absolutely. By doing that, you have something tangible, as you say. Here’s a great thing. As you get better and better at trading, you can match your living expenses, which then, your financial independence.

Ryan Scribner: Sure. Then at that point you don’t have to go work if you don’t want to do that, right?

Jason Graystone: You free up your time.

Ryan Scribner: That’s the situation you were in, right?

Jason Graystone: You free up your time. As you free up your time, you can earn even more money, because you’re focusing more on trading …

Ryan Scribner: More of your energy and efforts onto … Yeah.

Jason Graystone: Absolutely, so you’ve got it. Just have your numbers, work that out, know what you’re working towards, and know that it’s going to take you a while to learn. That’s expectations.

Jason Graystone: The next thing that’s really important is accountability, self-accountability, because it’s all on you. With other markets, if you’ve got a shot, you’re selling a product, you’re relying on customers, you can blame the staff for not showing up.

Ryan Scribner: Yeah, you have excuses.

Jason Graystone: You’ve got excuses. You can blame the supplier for bad goods. You can blame the economic crisis.

Ryan Scribner: Blame the weather, whatever you want.

Jason Graystone: Blame the weather, blame the traffic, blame the geographical location your shop’s in and everyone’s gone vegan. You can blame things. With trading the markets, it is all on you. If you lose money, it’s your fault.

Ryan Scribner: That’s something that I’ve heard from people as well is, they say, “Oh, the stock market stole money from me.” It’s like, “You handed it over.” If you lost money, you have to at least own up to that. You can’t blame the market. It didn’t reach into your bank account and pluck out money, you know?

Jason Graystone: We hear the same thing. It’s like, “Oh, the broker stopped me out,” or, “The broker took my money.” If you make statements like that or if you hear people say statements like that, it just shows a lack of knowledge towards how the orders are executed in the market. Absolute rubbish. You need to know that you’ve got to be accountable. Self-accountability is absolutely key.

Jason Graystone: Secondly, you’ve got to be accountable to not go off and chase the shiny object. You’ve got to stick at one thing. This is going to take you forever. This is what I struggled with. You think that someone’s got a better system, and you go and follow that.

Ryan Scribner: Yeah, jumping around from one thing to another and just kind of dabbling with it, right?

Jason Graystone: It’s so inefficient, right? If you just have one thing and go for it and don’t worry about …

Ryan Scribner: What everyone else is doing, yeah.

Jason Graystone: Just focus on one thing, one system. Trust me.

Ryan Scribner: That happens a lot of the time too with the stock market, it’s kind of a social thing. If you’re investing, you talk to your friends who are investing, and you hear about your friend’s in a certain stock, and maybe you’re not happy about the one you’re in, so you say, “Oh, I’m going to sell this and buy that,” and you end up jumping around.

Jason Graystone: You’re in too late.

Ryan Scribner: Generating a flurry of activity and really having no success with it, because you’re not really doing it for the right reasons. You’re just trying to …

Jason Graystone: It’s not strategy.

Ryan Scribner: Yeah, there’s no strategy to it. It’s just, “Okay, what’s this guy doing? I’m going to follow him.”

Jason Graystone: Absolutely.

Ryan Scribner: Now Jason is going to jump over and give you guys some recommendations as far as what equipment you need to get started with this whole process, so we’ll see you guys back here in a bit.

Jason Graystone: Sure.

Jason Graystone: All right, in this lesson I’m going to be going over the equipment that I think you need to be able to trade professionally. There’s lots of common misconceptions about needing thousands of pounds worth of PC equipment and six monitors and so on, and that’s simply not true. When I started trading, I started trading on a 15-inch laptop, and I did most of my testing on that laptop as well. In this video, I’m going to go over what I think are the minimum requirements, and then I’m going to go over what I think you should really have if you have the budget for it. If you only have the budget for the minimum standard, then go ahead with that. If you don’t have the budget for the minimum standard, well, you can either not trade or simply go with what you have.

Jason Graystone: When I start talking about i5 or i7 processes, and you say you only have an old Core Duo, then you can start on that, but if you’re going to treat this as a business, I really believe that you need at least the minimum specification laid out in this video. You may be aware that technology moves very, very quickly, and it becomes dated quite quickly. If the last time you upgraded your PC was over three years ago, say, then it’s likely that the software or the hardware that you’re running is out of date. The first thing you need is a decent processor. If you have recently bought a laptop or a PC, the chances are you already have one. It’s going to be an i5 or an i7 processor. The minimum requirement, in my opinion, would be an i5 processor, and if you have the budget, well, then an i7.

Jason Graystone: The second thing that’s important is the RAM. What RAM does is it allows your PC to run multiple processes at once. If you think of the processor being the brain of your PC, then the RAM is how many different things the brain can juggle at one time. What I recommend is 4 gigs of RAM as a minimum. I’m going to suggest to you that you go with an 8 to 16 gig of RAM, but if you buy a new PC or laptop, it’s likely to come with 8 gig unless you specify otherwise. RAM Is very cheap, and if you get the chance to upgrade when purchasing, it will be well worth investing in the upgrade. Otherwise, you may get down the road and wish you had done it when you bought the PC, but just know that 8 gigs of RAM is enough.

Jason Graystone: Next on the list is an upgraded hard drive. If you think of RAM as processes handle at once, then the hard drive is the memory. It’s the place that stores all of the processes that aren’t being used. The speed at which it can grab the unused processes depends on the speed of that hard drive. You can have a lot of RAM and a great processor, but if it takes your hard drive a long time to find the information that the RAM and the processor is asking for, then you’ll still have a slow machine. Many machines will come with a traditional hard drive, such as a one-terabyte hard drive, 7200 RPMs SATA drive, and it will get the job done for most people. Since you aren’t most people, and you are a trader in the making, I’m going to recommend that you upgrade to a 256 gigabyte Solid State drive. There are a couple examples here. The first one is a Samsung SSD 830, which is very good. The next one is a SanDisk SDSSDP-256G25.

Jason Graystone: The next thing I’m going to go over is a solid graphics card, because crashes aren’t fun. The graphics card will allow your PC to run smoothly without lagging, crashing, and run multiple programs and use multiple monitors if you want to without getting that blue screen of death. Then you have to restart your PC, and you don’t want to have to deal with all that. You don’t want a graphics card that’s too small, especially with all the charts and live data that you’ll be using, and I have two recommendations here. The first one is an EVGA GeForce GTX 680, which is an amazing graphics card. It’s what graphic designers use for CGI. The other one is an EVGA GeForce GTX 760, which is nowhere near as expensive as the first one and will happily run a couple of monitors. If you want to be able to run three or more monitors, and you’re that type of person, then you may want to go for something like the 680.

Jason Graystone: The next thing is monitors. Don’t believe that you need six-plus monitors to be able to trade successfully, because you don’t. You can just use one monitor. I would recommend having a second screen, purely because you can use one for your chart testing and one to log your results. You can use one for your analysis and the other to place trades, or you might be part of a live room, where you want the live room on one screen and your charts on the other so you can follow along. This simply makes your life easier, and that’s really the only reason.

Jason Graystone: I have six monitors, but if you think of all the stuff that I do, I run a webinar, have news and social feeds going on, have the lower time-frame paris, the higher time-frame pairs, the screen recording software running, and I need to keep my eye on a lot of stuff at one time, especially as I’m talking to people in the live room and explaining my analysis in detail, I need to be able to keep an eye on things as I trade live in that room, and I don’t want to miss anything. For you, it’s really just not necessary.

Jason Graystone: With regards to monitors, I use the AOC 27-inch HD monitors, but in my opinion, you really should have two qualities. The first is that the monitor should be HD so that charts are crystal clear. The second is that they are anti-glare or matte finish screens. These two qualities will ensure you don’t strain your eyes when spending hours in front of the charts whilst learning and testing and even trading.

Jason Graystone: The last thing is your internet connection. A decent internet connection is essential to trading. Execution is critical, so you need your connection to be fast-working, reliable and not cut off just as you’re about to place an order, or a news event comes out, and you can’t get your stop list in place. It happens, so do your best to make sure it doesn’t. I would recommend an upload speed of at least 786 kilobits per second and a download speed of at least 3 mg, which is very common these days anyway, but make sure you can get fast internet. Don’t skimp on it. It will cost you in the long run, believe me.

Jason Graystone: All right. Just a recap, you need a computer with an i5 or an i7 processor, 8 to 16 gigs of RAM, upgrade to a Solid State hard drive, upgrade your graphics card, a monitor that won’t fatigue your eyes, and a solid internet connection, and that’s it. Even if you go with the low end of all of that stuff, you’ll still have a great trading machine. It’s going to do everything you need it to do. That’s it. That’s what I recommend, and if you have all of that, then you’re good to go.

Jason Graystone: This must be one of the most commonly asked questions that I get. “What charting software do you use? What charts are those? What do I need? Is that okay if I use this one? Is it okay if I use that one?” I know you’re probably seeing tons of different trading platforms advertised on the TV or web, and you have absolutely no idea what one you would need, so I want to share with you what I think are a few of the best charting packages that you can use.

Jason Graystone: I’m going to go over just three different platforms and give you the advantages and disadvantages of all three, in my opinion. Firstly, there are a few functions that I think you need on a good charting package. The first one is flexible movement. In other words, you want to have that 360-degree movement so that you can easily manipulate the charts whilst doing your analysis. The second thing I think is very important is to have real-time data connection. You don’t want a delay in your data, because this will be detrimental to your trading.

Jason Graystone: The third thing is a full set of indicators. You want to have all the indicators at your disposal should you require them. I use very little in the way of indicators for my own trading, but you’ll need to have the RSI ATR and the Fibonacci indicators as a minimum. The first platform I’m going to recommend is TradingView.com. TradingView.com is a completely free charting package that offers extremely flexible and powerful tools in real time.

Jason Graystone: You can now link your broker account to that package, and you can place trades on the charting package as well. For charting and analysis, this is a great package. It has the 360-degree movement on the charts. You can set watch lists. You can set alert levels that will email you or text your phone when the market has reached them, so you don’t have to be at your PC all day. All of your analysis is also saved on the screen until you delete it, so you can close the web page, open up on another PC, and it will all be there just as it was when you left it. It has all the tools and indicators, and the developers are frequently releasing new tools and features. This package will give you news releases, you can place demo trades, so it’s good for your forward testing or demo trading, and it will even log your performance for you.

Jason Graystone: A couple of downfalls to the package, in my opinion, is the lack of data. You can currently only go back around a year or two, which means if you’re testing strategies on the 60-minute time-frame or even the 15-minute time-frame, the chances are you’re not going to get that 100-trade sample size that I recommend.

Jason Graystone: The second thing is that this platform has a social media aspect to it as well, where you can share ideas with other traders, which is quite cool, but the only downside, in my opinion, is the forum section. This can be extremely damaging and dangerous to traders, because trading is a fairly lonely business, and some traders get tempted to participate in the forums, and this results in Chinese whispers, lack of correct information, or just simply the urge or temptation to check that next shiny object, which we’re trying to move you away from. This will end up with you getting lost in the abyss again, and that’s not what we want. Don’t get me wrong. This is a great platform, except there isn’t quite enough data, in my opinion, and the forum section should be approached with caution.

Jason Graystone: The next platform I’m going to recommend, purely because it’s still very popular, probably the most popular trading package, and you may or may not have heard of it, but that’s MetaTrader, or MT4. This package is clean. It has all the indicators you will need here and can place trades directly on the chart, so it’s a charting package and a trading platform in one. The downside to this platform, in my opinion, is the indicators aren’t very user-friendly. The charts aren’t easy manipulated and can be quite limiting when it comes to the more advanced trading strategies. The platform is free, and as long as you have a data feed provided by a broker, you’re good to go.

Jason Graystone: The last trading platform I’m going to recommend is NinjaTrader. NinjaTrader is a very crisp, clean, and extremely flexible charting package. Again, it’s a charting package and a trading platform in one, so you can place trades live on the charts, and all of the tools are extremely user-friendly. The charts are easily manipulated, and everything is customizable. The platform, again, is free if you have a data feed from a broker, and you can save different workspaces for different portfolios or back-testing and real trading workspaces.

Jason Graystone: Also, the platform offers advance ATM strategies, which means once you get slightly more advanced, you can code your own automatic trade executions. This is the platform that I use, and I think it’s a great package, not only because of everything I’ve just mentioned, but to top it off, they have an outstanding support team and tons and tons of video tutorials on their YouTube page.

Jason Graystone: There we have it. You no longer need to worry about what platforms you should choose and what charting package to use. I would say go and have a play with all three, get a feel for which one suits you best.

Ryan Scribner: Okay, guys, welcome back. Now Jason is going to go into more detail here about really identifying some of these patterns in the market, correct?

Jason Graystone: Yep, that’s right. The first thing I want to talk about is the difference between fundamental analysis and technical analysis, because there’s no right or wrong. There’s people that rubbish either/or, and the truth is, there’s no analysis that tells the future.

Ryan Scribner: No. As much analysis as you do, you have no idea what’s going to … You can manage your risk involved with investments, but there’s never a guarantee that the market’s going to go any one way or another.

Jason Graystone: No. I think it’s crazy when people say, “Oh, that’s, you can’t use technical analysis to …” It’s crazy, right? Fundamental analysis is more news-based, more, the economic data, what’s going on in the world. Really, the reason that I don’t like to use fundamental analysis for trading is because you’re not getting the figure or the result. You’re guessing the market participants’ reaction to the result, which is impossible, right? You don’t know how people are going to react to a certain news release or a certain event.

Ryan Scribner: It’s the same way as well with investing in companies when you’re trying to bet on an earnings report. You guess about what the numbers are going to come in at, but you could have one thing in that earnings report that people don’t like, and that stock can go in the complete opposite direction of where you’re expecting it to. I completely understand you on that piece.

Jason Graystone: Yeah, a hundred percent. With technical analysis, technical analysis is based on psychology. There are patterns in the market, although people think the patterns are … We never know what’s going to happen next in the market. Contrary to popular belief, there are patterns in the market that stood the test of time. They’re not entirely random. The way that we build our edge is to identify a sequence of patterns in the market so that we know that if we get this pattern, then it’s likely to do this next.

Ryan Scribner: Sure.

Jason Graystone: What we’re looking to do is build rules around that pattern. If we see something that happens frequently, and we go back and test that, and it’s happened frequently for five years or six years or ten years, then if we can build rules around entering that, exiting that, that move, then we’ve got a high probability, we’ve got positive expectancy. We’ve got a system that provides us with a positive edge, a statistical positive edge. That’s really all we’re looking to do.

Jason Graystone: The reason I love technical analysis is because we don’t have to worry about what’s going on in the world. There’s a saying that the technical trader can trade the market regardless of knowing the market, and although that’s not entirely true, because you have to test the market, what they’re saying is, because of the technicals, it’s the patterns we’re looking for. It’s not necessarily the market. It could be Apple, Google, it could be currencies, it could be futures. It’s the patterns we’re looking for and the psychology in the markets.

Ryan Scribner: Can you make money in both bear markets and bull markets with this type of strategy? Does it matter if it’s going up or down?

Jason Graystone: Yeah, it makes no difference. That’s one of the great things about Forex, which is you can short the market and you can buy the market.

Ryan Scribner: What’s the majority of the trades you’re doing? Are they betting against, or are they bullish trades?

Jason Graystone: With investing, for instance, what you’re really doing as a passive investment, is you’re hoping that it goes up.

Ryan Scribner: Sure. [crosstalk 00:40:55] asset appreciation. You’re going to buy it and eventually sell it down the road at a higher price or collect your dividends.

Jason Graystone: Absolutely. The Forex market is in a different … It essentially moves sideways over time. Although it might be going bullish for a long, long time, it will end up at the same price that it was sooner or later, and we can go short, we can go long. The Forex market actually consolidates for a longer period of time than it actually is in a trend. Seventy to 80 percent of the time, we’re in consolidation, some form of consolidation, and only 20, 30 percent of the time we’re trending.

Ryan Scribner: Do you trade when it’s in consolidation, or no?

Jason Graystone: Yeah. I’ve got strategies for bullish, bearish, or consolidation. Another important thing is to be able to adapt for that, not just be arrogant, sort of stuck.

Ryan Scribner: If you can only make money at a certain … That’s also people who only can make money during a bull market with investing, you have to know how to make money in all, you’ve got to an all-weather investor or trader as well.

Jason Graystone: Yeah. Yes.

Ryan Scribner: All season trader. You can’t just be able to make money at a certain time and then say, “All right, I’m going to take a break for nine months,” or wait for …

Jason Graystone: That’s an interesting point. I think it’s important that you just touch on this again, that trading isn’t investing. We’re not just going long and holding. That’s not what we’re doing. We’re trying to get in and out and capture a higher, a move in the market that has a high probability so that we can get the profits out, and that’s it. We’re going in and out.

Ryan Scribner: I’m sure it varies, but how long do you usually have a trade open then? Is it, you close them at the end of every day, or do you have some overnight?

Jason Graystone: Yep, I do. About three hours a day trading a day, there sort of in and out within a half hour. I really day trade for the education piece so that I can show people what I’m doing, the methodologies, the process. If I wasn’t doing education, I’d purely be a swing trader, so four-hour time-frames. I’m in the trades from anything, for two days, up to two weeks maybe.

Ryan Scribner: They’re holding it overnight. I guess that was one of the other misconceptions, is that all day traders close everything by the end of the day. Is that true or it depends?

Jason Graystone: In the stock market, it’s close of the day. With the Forex market, if you’re in the UK, it closes at 10:00 on Friday night, and it reopens at 10:00 on Sunday night, but that’s it.

Ryan Scribner: The Forex market. Other than that, it’s open 24 hours, Monday through Friday?

Jason Graystone: Yep.

Ryan Scribner: Very interesting, so you could, if you wanted to trade at two in the morning, you have the availability to do that?

Jason Graystone: Yeah, you can trade 24 hours.

Ryan Scribner: Okay.

Jason Graystone: Now I’ve been over the technicals and explained a bit about the patterns in the market, what I really want to do is show your listeners how we can identify these patterns. I’m going to go into my trading desk and give you guys an example.

Ryan Scribner: Okay, sounds good.

Jason Graystone: All right. As mentioned just now, we’re going to look at the way the markets move and how we can identify some patterns, and I’m going to be going through a simple pattern I want to share with you that then you can go and identify for yourself.

Jason Graystone: The first thing I want you to be aware of is the market moves, how the market moves, because you’ve probably seen the market move up, and you’ve probably seen the market move down, and you’ve probably seen the market move sideways. When we’re moving up, we call this a bullish trend, and when we’re moving down, we call this a bearish trend. When we’re moving sideways, this is either called ranging or consolidation.

Jason Graystone: When we see the market moving in any direction, there’s certain things that we can pay attention to that are likely to cause a reaction or the market’s likely to respect. The first thing is going to be even-handled numbers. If we’re talking about the market being driven and the patterns in the market being respected by psychology, patterns being psychologically driven, sorry, one of the things we’re paying attention to are even-handled numbers. Anything like a dollar flat or 1.5 or 1.1, 1.2, anything with an even-handled number, the market tends to respect more often than it doesn’t. Not every time, but more often than it doesn’t. Remember, we’re going for that statistical edge.

Jason Graystone: Another thing that the market respects are numbers with 50 in it, so anything with 50, so 1450, 1550, 1350. Fifty and even-handled numbers, just bear in mind that that’s respected. Any time that the market respects any psychological number, what we see is structure. The next thing we’re going to show you is how the market moves. What you’ll see is this cyclicity, where we see cycles in the market of a new high, a retracement, and then we’ll see a new high. Then we’ll see a retracement. Then we’ll see a new high. The market moves in ebbs and flows like this.

Jason Graystone: Usually, the structure, this is what creates structure. Normally, these structure levels are created by even-handled numbers or significant levels of importance of being respected previously in the market. What also tends to happen is as we push up, what we call this is a resistance level, and what we call this is a support level, so this is like the ceiling, where we hit resistance. This is like the floor, where we bounce, we hit that support level. What we normally find is that when we put in new highs and we push back down, previous resistance then becomes support, so the structure is actually respected as well.

Jason Graystone: One of the things I just want to touch on is how to identify a trend. Then what I’m going to talk about is how we look at the end of the trend, and we can predict a reversal. First of all, to identify a confirmed trend, we’re looking for a three-point move. We’re looking for this move, the retracement, and then the new structure high. Then what we know is, we have a high probability that the market’s going to continue up until we violate this previous outside return or retracement here, at which point we’re in consolidation, and then we need to look for that three-point move again, one, two, three, in order to make a prediction that we’re likely to see a continuation to the downside.

Jason Graystone: Normally, we see this, this, this, this, until we end up reversing again, violating this outside return or retracement, and then we look for that three-point move again. It just continues like that. The reason we do that is because once we hit that three-point move, we know we have a higher probability that the market’s going to move up or down, depending on what direction we’re going in.

Jason Graystone: The pattern I want to talk to you about today, there’s many, many different ways to make money in the market. I’ve been over certain things that affect structure in the market, like even-handled numbers, 50-levels, previous structure, and historical levels that have been respected time and time again. What I want to go over in this video is, when we spot a reversal, so there’s a pattern that happens frequently at this point that we can use to short the market at the end of a bullish trend, or if we’re in a bearish trend, we can then look to, by the end of the bearish trend, and look to buy this up.

Jason Graystone: There’s a simple pattern here called a double top. You might have heard of this referred to as a V-top, but it’s a double top. Essentially, what it looks like is this. We get to the end of the trend, we then have a small retracement here, and then one final push up, we get reject to this test, and then we fail to put in a new high, and then we roll over. This is called a V-top, or a double top, and I’m going to go through the rules of this right now.

Jason Graystone: Let’s just say, for instance, that the market’s been pushing up, and we’ve identified our test, our initial test, and then we’ve started to retrace. What we’re looking for for this to be considered a valid double top is a test of this high. This high wick of the candle, we’re looking for a test of this level, so this zone here, for a second test. What we’re looking for is a test of this high, and what we can’t do is close above this previous high. If the candle pushes up and closes above this previous high, what we’re talking about then is a continuation to the upside. It’s important that we wait, and we wait for the close of this candle. As long as it doesn’t close above the high, it can do this, it can push up and put in a higher high, but it can’t put in the higher close.

Jason Graystone: We’re looking for a test of this zone. We cannot close above this high, and as soon as we get a valid retest, which can look like this, it can look like this, it can even look like this, or it can look like this, because we’ve tested this zone, and we haven’t closed above. As soon as we get this formation, this is considered a valid double top. Normally, double tops are price and time symmetry on the retracement, so we have price and time symmetry on the retracement as well, but, essentially, what we’re looking for is this little V, and then we’re looking for a retest of the initial test high but not a close above the high. This is what we call a double top. Typically, what we’re looking for after this is to enter a trade on the next candle, and then we’re looking for the market to roll over.

Jason Graystone: Now you’ve got a grasp on how to identify some patterns. What we’re going to talk about is how you actually build a trade plan, because this is essentially going to be your business plan for being a trader. What I always say to people is, the first thing you want to ask yourself when deciding what time-frame to trade or when to trade is, when can you consistently be in front of your charts, because people have jobs, people run errands, people take their kids to school. They’ve got their shopping coming on Tuesday. They’ve got the things going out on … Right?

Ryan Scribner: Yeah.

Jason Graystone: When can you actually consistently dedicate time to being in front of your charts, because what we’re going for here is consistent profit. Everything needs to be grounded and based off of a consistent plan. It makes no sense for someone who’s got a full-time job to try and check charts at lunchtime or …

Ryan Scribner: At their desk or sneak it in between … Yeah.

Jason Graystone: They’ll phone to a client, or they’re rushing for a meeting. It’s silly. You don’t want to do that. The first thing you want to do is go, “When have I got an hour to dedicate?” It might be at lunch. It might be an hour after work, after the gym.

Ryan Scribner: But uninterrupted time, basically, is what you’re getting at.

Jason Graystone: It’s uninterrupted time. It doesn’t matter if there’s more volatility. It doesn’t matter what’s going on. Just make sure it’s a dedicated time that you can just dedicate to being consistent. Then just find one pair for now, one market. Don’t try and find lots and lots of different markets. Don’t scout for different markets. Just get to know one.

Jason Graystone: I always like to think of it, when I met my wife, I met her in a bar, and all I knew about her that night was she liked white wine, right? That’s all I knew. The next day when I rang her up and wanted to meet her again, we went out to dinner. I knew what food she liked. Then I knew what pattern, when she had lunch, when she was out on Sunday. If you can just get to know one market first, you’re going to get to know the market, you’re going to understand more about that market and how it behaves. The markets behave in different ways. There’s different markets that behave different ways. It’s best just to know one pair.

Jason Graystone: If you’re looking at what market to look at, just pick one of the majors, one with the dollar in it. You’re going to get a bit of movement. Any pair with the dollar is going … The dollar’s the base currency for the world, and if you pick a pair with the dollar, you’re going to have some movement. It’s not going to be boring. There’s going to be something for you to test. There’s going to be something going on. Just pick one, so Euro dollar, pound dollar, Aussie dollar.

Ryan Scribner: I believe that’s familiar or similar to, as well, with people who day trade, they usually only trade a basket of stocks. They have a couple that they’ve learned the personalities. They typically don’t just pick one out at random. They learn the personality of each one of these stocks. Is that the same thing as what you’re talking about here?

Jason Graystone: Absolutely. I always say that, trading is a business, and these markets that I’ve got on my screens are my employees. They’re my employees. They’ve got different personalities. Some perform better under pressure. Some perform better in the summer. Some show up late. It’s very, very similar to running any type of business. If you look at it like that, you’re going to appreciate that some are going to perform differently. Also, if you did start a business, you wouldn’t employ 30 people on day one.

Ryan Scribner: That’s a very good way to explain that, yeah.

Jason Graystone: Right? It’s insane. You just wouldn’t.

Ryan Scribner: It’s kind of like, because I talk a lot about passive income on The Channel. They say the average millionaire has seven sources of income. You’ll get people who want to start all seven at once. It’s like, what are you going to do, dedicate one hour a day to each one and then become a millionaire? You do one very well, and then you move onto the next one. There’s a lot of ways that that’s applicable.

Jason Graystone: Then once you’ve got your pair then, and you’ve got the strategy, what you want to do is, you don’t just want to take every single setup that you see. If you was to go through different markets and apply one strategy, you’d probably have thousands of thousands of different opportunities per month. What we want to do is, we want to add some filters to that so that we get the higher probability move. Although we’ve got an edge by identifying a pattern in the market, what we really want to do is identify the really high probability. You can add things like filters, and what I’m going to do now for your listeners is just show you how we go back to that example I just gave and then add some filters to that to really give you the higher probability trades. Let’s jump back to the desk.

Jason Graystone: All right. As we’re building out a trade plan, what we want to do now is take the double top principle, and we want to apply some filters so we’re not taking every double top that we see, because if you just apply those rules and you look for those rules for a valid double top, you are actually going to see them form in many places that don’t provide high probability trading opportunities.

Jason Graystone: What we’re doing is we want to build some rules, build out a plan and say, “I’m going to have some filters in place so that I only look for these trades in the highest probability zones.” Taking into consideration what I’ve been over already, what we’re going to look at is, we’re going to see that we’ve pushed up here, and you can see that we’ve held this level before we’ve started to see a retracement. We’re monitoring the market pushing up, and we’ve seen a hold of this level, which just so happens to be the 0950 level. If you look over here on the right, we’re at a psychological number, that 50 level.

Jason Graystone: We’ve hit that level, and what I’m going to say is, if we zoom out now, so if we just zoom out this market and we go back in time, we put our horizontal line in, and we’ve scrolled back in history, and we’ve seen, actually, we’ve tested this level once, twice, three times, four times, five times, six, seven, and we’ve held this level much more often than we’ve broken through it. Every time it’s tested, it holds more often than it doesn’t before it’s violated. What I’m going to say is, you have a rule in your trade plan to say, “I need at least three previous touches of this level before I consider entering this trade.” The first rule is, a minimum of three previous touches of this level before I take the trade.

Jason Graystone: The next thing I’m going to look for is something called the RSI. This little squiggly line down here is the RSI, which stands for relative strength index. What this does is, it indicates over-bought conditions in the market. I’m not going to go into too much detail on this right now, but just know that if we pushed above the over-bought condition, it indicates that the market’s running out of steam. If we couple this as a filter with the fact that we’re at a psychological number that’s been tested three times, at least three times previously, we’re likely to see a little retracement.

Jason Graystone: We’ve seen the retracement already, so now what we’re looking for is that second test and that rejection, that hold of this level. What we’re going to do is, we’re going to watch what price action does next. We know we’re interested in this level. Now we’re going to peel our eyes and wait for the rest of our rules to be met, which I’m going to explain right now.

Jason Graystone: You can see the price action’s started to push back up, but remember the rules of the double top. We are actually, we need a test of the high, the previous high, which is this little zone here, the high wicks of the candle. We need the price action to push up and at least test that zone and not close above the higher of that test. Let’s see what happens next.

Jason Graystone: All right. You can see that this candle here hasn’t quite tested the zone. It’s pushed up, but it hasn’t quite tested the zone. Therefore, it’s not valid, so we can’t take the trade yet. What I’m going to be looking for on the second test, you know I mentioned that we were over-bought. What I’m going to look for is some bearish divergence. I’m looking for equal tests of this high, and I’m looking for bearish divergence, so a slope down on the RSI, equal test of the high on price, bearish divergence on the RSI, and that’s going to be used as another filter.

Jason Graystone: So far we have psychological number, which I’ve moved, psychological number, at least three tests of the level previously, over-bought condition on the initial test, and the bearish divergence on the second test. By waiting for those filters alone, it’s going to turn your trading opportunity that you’re looking for, your trading strategy and your plan, into a very, very high probability system. Let’s see what happens next.

Jason Graystone: All right. You can see on this candle, we’ve actually tested the zone. We haven’t closed above the high, so what we can do now is actually sell the market, next bar market. what that means is as soon as this candle closes, and we have to wait for this to close, because if we don’t wait for this to close, the chances are we could push up and close above the previous high, which would mean it’s invalid, so we wait for the close, we wait for the candle to close, and then we sell the next bar market.

Jason Graystone: Then what we want to do is we want to put our stop loss above the high, and I’m going to use a ten-pip stop loss, so we’re going to go ten pips above. We’re going to up at -60, 0960, and we’re going to take profits off, for this example, a retest of the low. We’re just looking for a pull back down into a retest of this low. We’re going to sell this now next bar market and we’ll see what happens next.

Jason Graystone: There we have it. You can see that we’ve rolled over. This is a high probability, because we’ve waited for those filters to be met. We didn’t just take any double top that we saw. We waited for those filters, which gave us an extremely high probability of being right. In fact, you can see here that we continued down even further.

Jason Graystone: That’s how you identify a trading strategy, a pattern in the market that happens frequently. That’s how you add filters to it to make it a very, very high probability trade rather than just taking those low-quality trades. That’s how we combine it all together to really give you those high probability moves.

Jason Graystone: Let’s just say for the sake of this example that this risk here, where we entered, was one percent of your account. Then if we just clone this, you’re going to see that this was a one, about one-and-a-half-to-one risk reward, which means this would be a one-and-a-half percent profit on your account in one trade.

Jason Graystone: Hopefully, you can get a bit more excited about how we can really hone in on those high probability trades, and instead of there being thousands of different opportunities, we’re honing into ten opportunities a month here to really get those high probability trades out of the market. What that does, it suits many peoples’ personality, because if you’re like me, I personally like to be right more than I’m wrong, and I like to win more when I’m right than I lose when I’m wrong. I just like that edge. Some traders I know, they’re happy being wrong seven times out of ten. They’re happy with that, because they’ve got a much bigger risk-reward profile.

Ryan Scribner: Is that based on your personal preference, or is it based on your risk tolerance, or you just figure that out through testing it out?

Jason Graystone: Absolutely. It’s your personality really. It’s so important to build it around your personality. If you’re not happy being wrong more than you’re right, then don’t have a system that does that, right?

Ryan Scribner: Sure, yeah, makes sense.

Jason Graystone: I like being right at least 50 percent of the time, because then I know I can make money with money management. I’m going to talk about money management now. Once you’ve found a system that is profitable and it’s proven to be profitable, where the real money’s made is through money management. This is a strategy. If you think about a coin flip, if I was to flip a coin, if you flip a coin a hundred times, over that hundred times you’re likely to be right 50 times, right?

Ryan Scribner: Sure.

Jason Graystone: It’s a 50/50 flip. If every time it was heads, I paid you a dollar, and every time it was tails, you had to pay me 50 cents, you’re going to want to flip that coin as many times as possible, because you’ve got a statistical edge of having 50 percent, but you’re going to win more over time.

Ryan Scribner: Yeah, you’re not going to lose as much when you lose. You’re going to make more when you’re right.

Jason Graystone: Absolutely. That’s called risk management. If you just add a money management strategy to that, let’s say, for instance, every time you hit ten winning trades or ten winning flips, we increase the size, and every time you lost five …

Ryan Scribner: You decrease …

Jason Graystone: You decrease.

Ryan Scribner: Okay.

Jason Graystone: What we’re doing is we’re protecting our capital as we’re going through a bad period, because there will be losses, there are losses. Then we’re increasing your capital, or your position size, as you’re doing well, as you’re going through those hot streaks. What that does, it allows you to accelerate your account and protect your capital.

Ryan Scribner: One question that I have, and I’m not sure if you touched on this previously, but how much … If you really want to get started with this, and you want to go through the whole testing phase, and you know you’re going to lose money, how much money do you realistically need to have in order to get through that learning curve and figuring this all out?

Jason Graystone: Let’s talk about losses then, for instance, because there’s a cost of doing business, right? As you said earlier, whether it’s education …

Ryan Scribner: Yeah, there’s no such thing as a free lesson out there.

Jason Graystone: No, there’s not. It’s a business, so you’ve got to buy a laptop, a PC, right, which I’ve been over, the equipment. You might have to have a membership to a trading platform. It’s the cost of doing business, so there are overheads. With the markets, the losses are the same as any other business, except they don’t come in the same order.

Jason Graystone: If you think about a product, if we sell a physical product, we’ve got a markup on that, but we’ve got overheads, and we’ve had a cost of producing the product. If we sell a product for ten dollars, we might get three dollars profit at the end of it, and every product we sell, we know that we’ve got to pay the overheads, we get three dollars, and we’ve got the profit.

Jason Graystone: With trading, the losses are just the cost of doing business. Then the profits, they don’t come on every trade. It’s over time. You could have a week of losses, and then you could have two weeks of winning trades. It’s not on every single trade that you get the profit and loss, and that’s what people really struggle with, because they think, “Oh, God, I’m losing trades,” but that’s why it’s important to stick to the plan, because you know you’ve got a statistical edge over time.

Ryan Scribner: Sure. Is it really about just consistently showing up and applying the same principles each time?

Jason Graystone: Absolutely. We’re going to talk a bit about back testing now, because now you’ve got the plan, and you’ve got the rules, and you understand money management. The first thing you need to do, or the last thing you need to do, I should say, before you go live is to test the system. This is the thing that’s skipped most. I would say that 98 percent of the people that go into trading don’t do this bit.

Ryan Scribner: Really?

Jason Graystone: Yeah.

Ryan Scribner: You think this is a big part of why that failure rate is so high?

Jason Graystone: One hundred percent. For me, take my example, for instance. For me personally, it was a turning point. It was what changed me from just blowing money to being very consistently profitable. I’m going to talk a bit about back testing.

Jason Graystone: Once you’ve got your market, and you’ve got your system, your strategy, you want to go and test that over time. Use your historical data that I went through on the trading platforms, and what you’re looking for is a minimum of five years, or a hundred trades, whatever comes first. Depending on the time-frame, if you’re very small time-frame, you’re looking for a hundred trades, which might be two years, or if you’re in a higher time-frame, on the four-hour or the sixty, you might have to go back five years to get the hundred trades, right?

Ryan Scribner: Sure.

Jason Graystone: You want a minimum of a hundred trades or five years of data. What the back-testing phase does is it gives you black and white results on the probability of your trading system. What you then you want to do is go out and replicate in the markets what you’ve tested. You don’t want to deviate from that at all. You literally want to build the rules off of your back-tested plan and say, “This is what I’m going to do going forward.” It’s a set of tangible rules that says, “This is the results you’re likely to expect, so go out and do that.”

Ryan Scribner: Based on the historical data looking at those trades.

Jason Graystone: Yeah. If you’ve got a system that provides a return of 40 percent, 50 percent, return on investment per year, you want to stick with it. You want to go with that, right? You don’t want to tweak it, but the amount of people then get that and then go out and start breaking the rules and then going, “Why am I losing money?” The other problem that they do is they test one market, and because that’s profitable, they bring in another market, and they assume the strategy works on that one.

Ryan Scribner: Oh, they try to take that strategy and apply it to a different market entirely?

Jason Graystone: Because they can’t be bothered to test it, right?

Ryan Scribner: Is this the most time-consuming aspect of it?

Jason Graystone: Yeah. It takes me around 20 hours per market to test.

Ryan Scribner: To back-test it, okay.

Jason Graystone: I would say that you need to test one market, one strategy, one time-frame, at a time. You don’t want to be jumping around strategies. You don’t want to be jumping around markets. You just want to get one whole set of results done, and it’s going to take about 20 hours to do one.

Ryan Scribner: That’s funny how that is. The most time-consuming piece is usually the most important piece. Then people just skip it, because they’re like, “Ah, I’m not going to be bothered to spend 20 hours …” and it’s really, if that’s the differentiator there between the successful and the unsuccessful …

Jason Graystone: It really is.

Ryan Scribner: … it’s amazing, but I certainly believe it.

Jason Graystone: I want to give you guys the realistic expectations. If you don’t do this, you’re going to have a very hard time. Just get it done, and it is grueling. It’s horrible. It’s the worst part.

Ryan Scribner: Is it just sitting there looking at chart after chart, looking at the outcome?

Jason Graystone: Tick, tick by tick, going through the rules. If this happens, then I’m looking for this. If that happens, then I’m looking for that. Then you’re setting your entries, and I’m going to give you guys an example on the spreadsheet on how to do that. It is just horrible. I didn’t speak to my wife for three months when I was doing the testing. It was horrible. That’s what’s required. In the grand scheme of things, it’s not a lot of time. You’ve just got to get it done.

Ryan Scribner: Yeah, you just got to get through it. That’s the way it is with anything, and you saying, having been involved in different businesses, there are certain parts of it that you love, and there are certain parts that you hate, but they’re equally important, and you have to get through those parts that might not be so glamorous or interesting to you.

Jason Graystone: Of course. Lots of people don’t talk about back-testing, because it’s not very glamorous.

Ryan Scribner: Yeah, that’s not going to sell this when you sit through, if people are trying to sell their programs, if you sit there and say, “You’re going to hate this. It’s going to be grueling. I didn’t talk to my wife for three months,” that’s not a great sales pitch, you know?

Jason Graystone: By myself. Yeah, yeah.

Ryan Scribner: Buy it anyway, you know? I think that’s why people really appreciate you, is because you’re so honest, and it’s almost kind of takes people back that you’re this honest, because there are a lot of very shady people involved in trading, in particular. You see a lot of it.

Jason Graystone: I get that. There’s people, the trolls on YouTube, and they retaliate, and I get that, because they have been led up the garden path, and they’re like, “Oh, no, I’ve actually got to do some work. This can’t be true. I’m going to just … No, you’re telling lies.” It’s sort of like denial. You can see from the people that I work with and the community I’m in that my only motivation is to give people the truth, based on my own experience.

Ryan Scribner: Absolutely, yeah.

Jason Graystone: If you take one of my private clients, for instance, he applied the strategy, tested a couple of pairs, and then he just went and assumed that it worked on all the markets, right? He was trading for two years, just slowly bleeding money, and he wasted two years of his life until I said to him, “Show me your back-tested data,” and he said, “I haven’t got any.” I said, “Well, you’ve got to go and do that, and I’m going to give you three months to do it.”

Jason Graystone: He went back. Three months later, he had all the tested data. I was checking it all for a, spot-checking everything. He then produced a report that said, “This pair wasn’t profitable. That pair wasn’t profitable. This pair wasn’t profitable with that pattern. This pair wasn’t profitable with that pattern.” He knew to take out all of that stuff, and it changed him from being, bleeding money over two years, to doing three and half, four percent, per month, in three months.

Ryan Scribner: Amazing. It just seems silly to me if that takes … Okay, it is a grueling process, but if it just takes that certain amount of time, to then waste two years doing it wrong, because you don’t want to start and have that proper foundation, is just crazy to me.

Jason Graystone: If you think about it, it’s just because they didn’t go back to the start of this video and actually want it. They haven’t got expectations. They don’t know why they’re doing it. That’s why this process is absolutely crucial.

Jason Graystone: Lots of people over-complicate back-testing. They don’t know where to start. They ask me if we can automate it or use a mechanical system. My answer is always, it’s always best to do it manually. I like good old Excel, and I’m going to show you a spreadsheet that we’ve developed, very comprehensive spreadsheet, that does all of the calculations for you, and it’s also a journal, and it also does your money management. I’m going to just show you in Excel first, just so you can grasp the concept of back-testing, because it really is easier than you think.

Jason Graystone: There’s a few things you want to pay attention to when we’re back-testing. The first column I’m going to put the market. In our instance, we’re trading Forex, so I’m just going to write the pair. That will be the Aussie CAD or, in our example, the double top that we just went over. It was the Euro dollar. The first thing we want is the market or the pair.

Jason Graystone: The next thing we want is the time-frame. We want to know what time-frame we are testing, if it’s the 60-minute, the 15-minute, the four-hour, the daily, or whatever. In our example it was the 60-minute, but we want to make a note of the time-frame.

Jason Graystone: The next thing we want is the entry date. We want to know where we got in. We want to know what date we got in. If we ever need to refer back or we’re crunching the numbers at the end, and we want to find out if there’s any periods that are unprofitable time and time again, and we need to remove them, it’s going to be important to have this information. On from that, we also need the entry time.

Jason Graystone: Lastly, we want to know the entry price, where we’re actually entering, buying or selling. Once we’re in the trade, we want to make a note about stop loss level, so that’s where we’re going to be wrong. Then we want to know our target price, so where the target is. Then, of course, on the way out of the trade, we want to know everything in reverse. We want to know the exit date, because the trade could go on for one day, two days, three days, whatever. We want to know the exit time, and of course the exit price.

Jason Graystone: The exit price is either going to be one of these two. It’s going to be the stop loss, or it’s going to be the target, because we’re either going to get stopped out, or we’re going to hit our target. The exit price will be one of these two, and we can use that combination to calculate the profit and loss at the end. In this one, we can have the total pips, or points.

Jason Graystone: Let’s go back to our example now and put some data into this table. Okay, looking at our example here, we know that we had to wait for a test of this level right here before we entered, and we had to wait for the close of this candle before we entered. If we hover the crosshair over this next candle, you can see that this is the 26th of April, and it’s at 8 am. The first thing we can do is our pair, which is the Euro dollar, so we’re going to go, “Euro, USD.” The time-frame is the 60-minute chart, so we’re going to go, “Sixty minutes.” We know that it was the 26th of April, so we’re going to put, “Twenty …” You guys in America do it opposite to us, so, “Four/Twenty-six/Eighteen … Seventeen.” Sorry.

Jason Graystone: Then we’re going to the entry time, 0800. Then what we’re going to do is put in the entry price. We know that it was next bar market, so we’re going to put the crosshair at this level here, and you can see on the right-hand side of the chart, it says, 1.0946. That is where we sold the market, 1.0946. Our stop loss I said was ten pips above the high, so we looked at the previous high, and we said, “Right. It’s ten pips above that,” so it was up at 0.961, so 1.0961. Then our target price was a retest of these lows down here at 0926, so 1.0926.

Jason Graystone: What we want to do is we want to track what happened next. The exit date was actually straight after, so this lasted one hour, this trade, a maximum of one hour, so the exit date is the same. I’m going to copy that and paste it in there, because I’m being lazy. The exit time was the same hour, so we’re going to go, 0800 again, and the exit price was, of course, our target price, so 1.0926.

Jason Graystone: Then what we’re going to do on this is, because we are selling the market, we’re going to go our entry price minus our target price, which will give us the total pips. You can see that the entry price was 0946. Take away 0926. That’s a 20-pip profit. You can put calculations in here to automate this, but you’re going to essentially see that we’ve got a 20-pip profit on that trade.

Jason Graystone: Now I’m going to show you our spreadsheet, which is a lot more comprehensive. It actually works out everything for you. It’s got some nice little charts here to show you your win percentage, your maximum losing streak, which is essential when we’re setting that risk tolerance and our position sizing. We’re looking at massive sample size. This is earlier on this year. You can see that we’ve been logging trades on this particular project for a long, long time. This goes all the way back to 2009, I believe. If we just scroll up here, there’s tons and tons of data here. This essentially works it all out for you.

Jason Graystone: In this case, we’re taking two positions, so we’re taking two targets, which is a little bit more complex, but it allows you to boost your account a bit more. Then what you can see, that this actually logs the back-testing into a money management spreadsheet, which actually tells you what your position size should be. It tells you the difference between fractional and smooth ratio, and also you can set the level at which, when you go above a certain profit, it triggers your position size so that then you increase your position size.

Jason Graystone: This is, as I mentioned earlier, how we can really accelerate our returns when we’re doing well and then protect our capital when we’re going for a draw-down. You can see just to here, for instance, that we’re increasing our position size until we take a loss, and then we drop back down. We then hit a winning streak until we take a loss. Then we drop down, and then so on. You can see how this takes, in this instance we took a $50,000 account to just under a million, and this is obviously over, since 2009, so this is a nine-year process from taking 50 grand to a million, but pretty decent.

Jason Graystone: This spreadsheet is very, very comprehensive, and you don’t really need something like this, but if you are treating your trading as a business, then I highly recommend that you have something a bit more complex than Excel, but just to go and back-test a strategy, hopefully you can see from now, from this little example here, how simple that can be and how you can really be on your way to go out and start testing these strategies.

Ryan Scribner: Something else I want to ask as well, can this be a hobby, or is this something you really have to be all in about? Can you just day trade casually or get involved with trading casually, where maybe a couple days during the week you want to sit down and trade, or do you really have to have that dedication to this?

Jason Graystone: That’s a really great question. The answer’s no. You cannot dabble in trading. You have to show up. Summer months are going to be quiet. Christmas is quiet. The big institutional traders who move the market, they’re the ones that go into the Hamptons for the summer. You have to understand, we don’t move the market. Retail traders, we have no power moving the market. It’s all …

Ryan Scribner: That’s the same way with retail stock market investors as well. Your buy order of ten shares of Facebook is not going to move that share price, you know?

Jason Graystone: Exactly. Exactly. All we have to do is, during those slow periods, we just have to show up, because there’s going to be maybe one trade, two trades, that we catch that keep us afloat in the summer. We’re really looking at a return on investment over time here. We’re not looking at a consistent hundred pips per day or a thousand pounds per month. It’s over time. You might have a month where you lose. You might have a negative month. You might have a break-even month. June, for me, was extremely profitable. May was flat. Then February was very profitable, and April was flat. It’s just looking at the average over time. You have to show up. You have to be consistent.

Ryan Scribner: Yeah, that is very interesting, because I’m sure a lot of people maybe don’t want to go all in with this, and it’s important to realize that it can’t just be a hobby.

Jason Graystone: It can’t be a hobby. You need to want it. You need to know why you want it. You need to have realistic expectations. You need to hold yourself accountable. You need to learn the right way, start at the beginning in the process, go through it the right way, and then you’ll have the results that you want. It’s as simple as that. The results are inevitable if you just go through that process.

Ryan Scribner: Sure.

Jason Graystone: Finally, let’s just talk about results then. If you’ve gone through that process, realistic results. People think that they’re going to double their account week after week. That’s absolutely ridiculous. What you don’t want to do is risk so much that you’ve taken a big hit, and you are now having to make up so much money just to get back to breakeven.

Ryan Scribner: Sure.

Jason Graystone: I use a smooth ratio money management strategy, which I’ve been over. Some people who just get into trading use a minimum percent risk of their account. Some people like to say one percent. I’d say that’s a good start, right? You don’t want to risk more than one percent of your account on any one trade. If you can consistently do that and just focus on not breaking that, then it’s going to take you a long time to be out of the game, right? You’re going to have your chips. You’re going to have your poker chips. If you blow 50 percent of your account, you’ve got to make up 100 percent of your account to get back.

Ryan Scribner: I’ve mentioned that too before, people think 50 percent loss, 50 percent gain, but that’s not going to get you back where you started. If you have a 50 percent loss, you now have to double your money to start back.

Jason Graystone: It’s very hard to double your account. It’s very, very hard to double your account. Realistically, in terms of results, what you’re looking at is if you can be consistent, and you can go through this process and learn the right way, you’re looking at around three, maybe four percent, conservative, per month, which compounds out to 40 percent per year.

Ryan Scribner: Which can do astronomical things to your money. I know a lot of people don’t understand the power of compounding, but that’s, I know it sounds like a little bit, but that has a huge impact on your …

Jason Graystone: Of course. If you couple that with obviously passive investments …

Ryan Scribner: Sure. Then something else that we could also tie in here as well is, do you recommend that a lot of people maybe take some of the profits from the high-risk side of investing and put it into a more passive strategy?

Jason Graystone: When I started trading well, I was investing anyway. I’ve got automated systems that do my investments and everything. When I started trading, I started splitting the money 70/30, so I had a 70/30 split. Then as I became better and better, I went to 50/50, but, absolutely, if you take some of the profits that you’re getting from your investments and you put them into your trading account, then you’re talking about a serious acceleration strategy there.

Ryan Scribner: Or the other way around as well, where maybe you want to take some of your profits and put them into a …?

Jason Graystone: Into an investment.

Ryan Scribner: … passive strategy where …

Jason Graystone: Yeah, absolutely.

Ryan Scribner: Okay, yeah.

Jason Graystone: It works both ways.

Ryan Scribner: You don’t have to be polarized there where you’re one or the other, you can do a mix of both of these things?

Jason Graystone: No, just find your strength. Again, you’re not going into trading as a be-all-and-end-all. This is another wealth acceleration strategy. It’s not something that’s the end. It’s just going to help you achieve financial independence quicker. That’s it.

Ryan Scribner: Okay, Jason. Thank you so much for coming on The Channel here. I certainly appreciate it. Where do people go if they’re looking to learn more?

Jason Graystone: We’ve obviously been over a lot in this video, and there’s a lot to take in. I recommend you go and re-watch it. If you really are interested in learning more about how to trade the financial markets, you can find the website below this video.

Ryan Scribner: Yep, everything’s linked up in the description. What is it, Tier One Trading?

Jason Graystone: Tier One Trading, yep.

Ryan Scribner: Then you also have a YouTube channel as well, where you’re pretty active posting videos on a consistent basis?

Jason Graystone: Yep.

Ryan Scribner: Okay.

Jason Graystone: Everything’s below, and hopefully be working with you soon.

Ryan Scribner: All right. Thanks so much for coming on.

Ryan Scribner: Thank you guys for sticking around and watching this whole video. If you guys want to see more videos like this, where I talk to different experts out there, let me know down in the comments section below. I’d love to hear your feedback. All right. See you guys later.

Fundrise Review 2018: Best Passive Real Estate Investment?

Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.

It seems like the American dream today is to make money by investing in real estate. I am sure we all have that rich uncle or family member that made a fortune by investing in real estate. One of the biggest obstacles to achieving this dream is the amount of money required to buy a single piece of real estate. The upfront cost for an individual to purchase a piece of residential or commercial real estate can be astronomical. This creates high barriers to entry to many real estate markets.

The typical down payment on a home is 20%. If this is a commercial loan for the purpose of renting it out or flipping it, this down payment could be as high as 25%. If you are looking at a $200,000 property, you could be looking at a $50,000 down payment without factoring in closing costs!

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S&P/Case-Shiller U.S. National Home Price Index

On top of that, home prices are on the rise. It is getting increasingly more difficult to invest in physical real estate.

There are plenty of people that are in their 20’s that want to invest in real estate, but they are unable to save the thousands or even tens of thousands of dollars required to get the ball rolling. The good news is, there are other ways to invest in real estate outside of direct ownership.

The Publicly Traded REIT

Traditionally, investors have been able to overcome these barriers by investing in REITs (real estate investment trusts) or other investment vehicles offered on public exchanges.

These investment vehicles are large pools of real estate split up into millions of shares and sold to hundreds or thousands of investors. These products allow common everyday investors to gain access to real estate markets.

This video provides a great explanation of what a REIT is.

The downside of this publicly traded real estate investment is that these products traditionally have high upfront fees and you may need a minimum net worth or income to participate in the investment. Another downside to this is a bit more complicated, but it is worth explaining. These REITs trade on a public exchange like the NYSE and NASDAQ. They are bought and sold just like a stock.

One way that investors look to achieve diversification is by investing in different asset classes. Typically, these are assets like stocks, bonds, real estate and even precious metals. While publicly traded REITs offer the ability to easily diversify asset classes and own real estate, these investments are heavily correlated with the overall market.

Generally speaking, if the markets are doing well the publicly traded REIT investments are as well. If the markets are performing poorly, the publicly traded REIT investments are as well. The point of investing in different asset classes is to have assets performing in different ways at different times. Maybe the stocks in your portfolio are performing poorly, but the value of the gold in your safe is soaring.

REIT ETFSP500.PNG

Consider the example above. On the left is a publicly traded Vanguard REIT and on the right is the S&P 500. In January and February of 2018, there was turmoil in the market and a broad market correction took place. As you can see, a correction also took place with the Vanguard REIT. While it is not identical, the performance of these two investments is very similar. This defeats the purpose of asset diversification, meaning the publicly traded REIT is not the perfect solution to our real estate problem mentioned above.

Fundrise Real Estate Investing Platform

One of these new real estate investment options is Fundrise. This is a new platform for investing in real estate that was founded in 2010. Fundrise is a new online investing platform that gives everyday investors the power to invest in commercial and residential real estate at a very low cost. The minimum investment to get started with Fundrise is just $500.

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Fundrise Logo

Fundrise offers investment plans to invest in different types of real estate such as income producing rental properties or growth oriented real estate developments. Fundrise offers different investment plans based on your investment objectives. Fundrise has significantly lowered the barriers to entry for real estate investment and offered an interesting alternative to the publicly traded REIT.

We will be explaining how Fundrise is different shortly.

Fundrise pools money from investors and separates the investments into different plans based on your investment objective. You can invest in a growth oriented plan, an income oriented plan or a blended plan. Fundrise takes this money and invests it in a variety of different real estate projects. This could be new construction or renovation of existing real estate.

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Fundrise Project, Briar Creek Townhome Renovation

Take the Charlotte, NC townhome renovation project for example. This is a renovation project taken on by Fundrise where they will be modernizing 46 townhomes in a desirable location in North Carolina. These townhomes have a dated look, and they will all look like the newly renovated home on the right upon completion.

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Fundrise Project, Briar Creek Townhome Renovation

Each project has a website where you can learn about the project as well as the investment opportunity. This investment has a Debt Rating of C, giving it a higher projected return. The Projected Return of this project is 10% at a Total Investment of just over $4.1 million. Collectively, Fundrise investors have funded this renovation.

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Fundrise Project, Briar Creek Townhome Renovation

Fundrise Investment Vehicles

Fundrise allows you to invest through two financial instruments that they invented; the eREIT and the eFund. The short explanation of these investments is that they are non traded, meaning they are not available on a public exchange like a traditional publicly traded REIT. The eREIT and eFund are also investments you purchase directly from Fundrise. This cuts out the middleman and reduces the overall fees.

If you want to dive a bit deeper, here is more information!

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Fundrise eREIT

Fundrise eREIT: An electronic non traded REIT built to provide income to the investor.

eREITs are created by Fundrise and have no broker fees and no front end load fees. Many traditional REITs have 7-15% front end load. Fundrise charges a 1% asset management fee annually (0.85% annual asset management fee and 0.15% annual investment advisory fee).

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Delaware Global Real Estate Fund (DGRPX)

Take the Delaware Global Real Estate Fund for example. This investment has a front load fee of 5.75% and an expense ratio of 1.4%!

eREITs are non traded REITs offered by Fundrise. Non traded REITs are highly illiquid, so understand what you are investing in before you decide to commit.

We will be talking more about investment liquidity later on in this review. 

efund.PNG
Fundrise eFund

Fundrise eFund: A professional portfolio of real estate assets.

An eFund is setup as a partnership instead of a publicly traded corporation. This allows the fund to avoid the double taxation that corporations are subject to. You will pay tax on capital gains and dividends as they are incurred. Where eREITs are designed for income, eFunds are designed for growth.

eFunds also cut out the broker in the transaction and helps maximize the investors return on their capital. eFunds also have quarterly redemption periods, so you will not be able to liquidate your position on an immediate basis.

Fundrise Fees Explained

Fundrise charges a fee of 1% per year. They do not charge any other hidden fees and there is no front load fee with Fundrise.

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Fundrise Fees vs Traditional Investment Fees

For more detailed information on Fundrise fees, keep reading! 

One of the biggest advantages to investing with Fundrise is the extremely low fee structure compared to other real estate investment trusts. As we mentioned above, a front load of 7 to 15% is not uncommon in the REIT industry.

If you were investing $10,000 in a REIT with a front load of 15%, you would be paying $1,500 in fees on Day 1! 

Traditionally, investors have been able to gain access to some of these real estate markets using non traded REITs. These are real estate investment trusts that are not offered on public exchanges. These non traded REITs carry the same benefit discussed above, having less correlation with the overall stock market.

To invest in a non traded REIT, you must purchase it through a broker or investment advisor. Most brokers will charge 5 to 8% commission on the total amount invested. Be careful when investing in non traded REITs through a broker or investment advisor. Often times, they will tell you they are not being paid any commission. Ask a lot of questions and understand the likelihood of hidden fees!

Beyond the front load fee associated with a non traded REIT, you also pay an annual management fee. This is typically around 1%, and this is the same fee charged by Fundrise. When you invest with Fundrise, you pay a 0.85% annual asset management fee and a 0.15% annual investment advisory fee for a total of just 1%. There are no other hidden fees with Fundrise and there is no front load fee.

Is it Safe to Invest in Fundrise?

Fundrise files with the SEC and is audited on an annual basis. These financial statement audits are disclosed on the Form 1-K. Beyond that, Fundrise offers a 90 day satisfaction guarantee. Some limitations do apply, but if you are unhappy with your investment in the first 90 days, Fundrise will buy it back at the original price you paid. Fundrise is for United States investors only, however international investors can invest through some US based entities. The minimum investment to get started with is $500.

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Fundrise SEC Filing, Form 1-K

Fundrise Investment Liquidity Explained

An asset has high liquidity if it can quickly and easily be converted into cash. Assets like stocks are highly liquid, as you can sell them on a stock exchange in a matter of seconds. Real estate is inherently a low liquidity investment. Real estate does not change hands as easily as a stock. It is important to understand that liquidity is never guaranteed when investing in Fundrise.

When Fundrise invests in a real estate project, it is typically a long term investment of five years or more. It is important to understand that as an investor, you should be ready to leave that money invested for the long term. Fundrise has stated this platform is for investors who have a minimum time horizon of five years. If you are a short term investor, Fundrise is not for you!

Fundrise offers a monthly redemption plan where investors have the opportunity to cash out each month following a minimum 60 day waiting period. It is important to understand however that liquidity is never guaranteed.

In order for Fundrise to generate the greatest return for investors, they need to remain as fully invested as possible. If Fundrise held 20% of the fund in cash for redemption, that means 20% of the fund is earning a return of 0% or close to it. This is referred to as the cash drag of an investment fund. Idle cash is not desired when it comes to an investment fund. In order to achieve high returns and keep investors satisfied, Fundrise remains as fully invested as possible.

Fundrise Investment Options 

Fundrise offers one plan for beginners who invest a minimum of $500 and three plans for advanced investors who invest a minimum of $1,000.

Investment PlanMinimum InvestmentPortfolioAnticipated Return
Starter$50050% Growth, 50% IncomeNot Disclosed
Supplemental Income$1,000Cash flow producing real estate focused on dividends8.5 to 10.3%
Balanced Investing$1,000Blend of both income and growth producing real estate8 to 11.7%
Long Term Growth$1,000Returns are primarily recognized by asset appreciation7.7 to 12.5%

How To Make Money With Fundrise 

Fundrise is a 100% passive investment. You simply invest your cash and it is immediately put to work. With Fundrise, you make money in one of two ways; asset appreciation and dividends or distributions.

Your eREITs within Fundrise will pay quarterly dividends or what Fundrise calls distributions. These dividends consist of interest payments from loans and rental payments. The amount of your investment in the entire eREIT determines the amount of your dividend payout.

If you buy into an eREIT, the first quarter your dividend will be prorated based on the amount of days you owned it during that quarter. After that, you will receive your dividend based on the amount of share ownership you have in the eREIT.

Investors can expect to receive dividends from Fundrise on a quarterly basis, but it is important to remember that these dividends are never guaranteed. Just like with the stock market, dividend payments are never guaranteed. The payout frequency and amount can be increased, decreased or the dividend can be canceled at any time.

In terms of asset appreciation, Fundrise will purchase properties with a high potential to grow in value. Often times this is a property in a booming area where population growth is exceeding the national average. The goal is to buy property ahead of a major trend and capitalize on the growth of the neighborhood. Once a property is acquired, Fundrise will often renovate the real estate and make improvements to increase the sale price and the value of the property. The returns are primarily realized upon the sale of the property.

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North Los Angeles Renovation Loan

Consider the North Los Angeles Renovation project. The city of Los Angels has the nation’s second largest economy and a massive housing shortage. On top of that, environmental and zoning regulations make it difficult to build more density. There is a massive shortage of housing in this booming area, and Fundrise has identified this as a huge opportunity. This $3.8 million renovation of a Los Angeles apartment building is expected to return 8.7% to investors. This is a perfect example of a growth oriented strategy where a return is generated primarily through asset appreciation.

If you’d like to receive mostly dividends in Fundrise, your best bet is to invest in the Supplemental Income Plan which aims to maximize income through dividends. Fundrise also offers a Balanced Investing Plan which aims to give you a mix of asset appreciation and dividend income.

Reinvesting Fundrise Distributions (IMPORTANT!)

All distributions or dividends from Fundrise will automatically be deposited into your bank account on file unless you opt in to the dividend reinvestment program. If you want to maximize your returns with Fundrise and allow your dividends to compound, you need to opt in to the dividend reinvestment program or DRIP. Fundrise provides this dividend reinvestment program free of charge as a courtesy for investors.

Compound interest is the effect of earning interest on top of your interest. By reinvesting dividends you are able to earn more dividends because you have a larger investment. Over time, the compounding of these dividends will result in exponential growth of your portfolio.

Here is our comprehensive article on compound interest.

Fundrise Portfolio
Fundrise Portfolio Screenshot

Consider the above Fundrise portfolio. This is an investment of $1,000 in the Balanced Investing Plan, so returns will be generated from both income producing properties and asset appreciation. Earnings to date is $6.42 and the next distribution is expected in mid October of 2018. On the right, you can see that dividend reinvestment is enabled.

Fundrise Historical Performance 

Past performance does not guarantee future returns. All investing involves risk, including potential loss of principle.

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Fundrise Supplemental Income Plan

The Fundrise Supplemental Income Plan aims to generate returns through quarterly dividends and it is less geared toward asset appreciation. The money invested in this plan is invested in income producing real estate and rental income is distributed to investors in the form of dividend payments or distributions.

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Fundrise Balanced Investing Plan

The Fundrise Balanced Investing Plan generates returns through both dividends and asset appreciation. The money invested in this plan is invested in both income producing real estate and renovation projects.

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Fundrise Long Term Growth Plan

The Fundrise Long Term Growth Plan generates returns through asset appreciation and it is less geared toward income producing real estate. The money invested in this plan is invested in real estate renovation projects where the majority of the returns are recognized when the property is sold.

Pros of Investing in Fundrise

  1. The minimum to get started with the Starter Portfolio is $500
  2. Since this is a non traded REIT, it is less correlated with the overall market
  3. Small retail investors are able to access private real estate investments
  4. Fundrise has a transparent fee of 1% per year 
  5. Fundrise does not have a minimum net worth or income requirement like most private investment funds do
  6. Fundrise gives you diversified exposure to real estate
  7. This investment allows you to earn compound interest, with the option of automatically reinvesting quarterly dividends
  8. Fundrise supports some retirement accounts
  9. This is a 100% passive real estate investment
  10. Monthly redemption periods eliminate the temptation for panic selling

Cons of Investing in Fundrise

  1. Liquidity is never guaranteed
  2. Distributions (dividends) are never guaranteed
  3. Distributions (dividends) are taxed as ordinary income
  4. Fundrise has a limited track record of four years

The Verdict

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Fundrise Logo

Fundrise is a perfect platform for passive investors who are looking to gain access to private real estate markets. Fundrise is also great for investors who are looking to diversify asset classes and have less correlation to the overall stock market.

Since you can only liquidate your positions quarterly, you may be less tempted to actively trade in and out of positions. You can also automate your dividend reinvestment plan, allowing compound interest to build up in your account.

Fundrise is best for investors with a 5 year time horizon. Real estate is not a highly liquid investment and inexperienced investors need to take this into consideration. While Fundrise does offer a 90 day satisfaction guarantee, you should not invest if you have a short term investing mentality.

Click here to get started with Fundrise!

What Is Compound Interest? (And How To Earn It!)

Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.

Warren Buffett, arguably the most successful investor of our time, attributes his success to being born in America, some lucky genes and compound interest. Albert Einstein called compound interest the eighth wonder of the world.

Buffett-Compound-Interest-e1460131728571
www.suredividend.com

For some, compound interest is the reason why they never have to worry about having enough money. For others, compound interest is the reason why they will never get out of debt. Those who understand it can apply this powerful force and accelerate their wealth.

One of the most amazing things about compound interest is that it does not discriminate. If you are rich, compound interest can make you richer. If you are poor, compound interest can make you poorer. It does not matter what race, gender, ethnicity or religion you are. Anyone in the world can earn compound interest, and it can change your life.

What Is Compound Interest

The easiest way to understand compound interest is to think of a snowy day. You go outside with the hopes of making a snowman and you begin packing a large ball of snow. Once you have a basketball sized ball of snow in your arms, you begin to roll it along the ground. At first, it appears that nothing is happening at all. It seems like you are rolling this ball of snow around for no reason!

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Snowman on a frozen lake, Wikimedia

This is the reason why most people give up, whether it be growing a business or growing your wealth. Most people are familiar with linear growth, assuming that the snowball will grow in size at the same rate every few feet that you roll it. The thing is, you are not experiencing linear growth, you are experiencing exponential growth. With this type of growth, the growth rate speeds up the larger something becomes.

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Linear vs Exponential Growth, www.valleyadvocate.com

Once that snowball is larger, it has a greater surface area to pick up more snow. It may have taken 2 minutes for the snowball the size of the basketball to double in size, but the next doubling cycle will take less time. This is known as the snowball effect.

The same effect can happen with your wealth as well. When you begin to earn compound interest, the returns seem insignificant at first. As you continue to allow your money to grow, the compounding effect becomes greater and greater and the growth rate accelerates. This is why many people refer to compound interest as the time value of money. It’s not about how much you have, it’s about how long you allow that money to grow.

When it comes to earning interest, you can either earn simple interest or compound interest. With simple interest, you earn the same rate of interest every single year. With compound interest, you are able to earn interest on your interest.

Consider the table below. This is the investment of $10,000 at 8% simple interest versus $10,000 at 8% compound interest over five years.

Duration$10,000 @ 8% SimpleReturn$10,000 @ 8% CompoundReturn
Year 1$10,800$800$10,800$800
Year 2$11,600$800$11,664$864
Year 3$12,400$800$12,597.12$933.12
Year 4$13,200$800$13,604.89$1,007.77
Year 5$14,000$800$14,693.28$1,088.39

Compound interest allows you to earn a greater return every single year. While this change seems insignificant, the growth takes place over time. Using the snowball analogy, those initial years are the packing of the snowball. The growth is invisible to the naked eye.

Consider this. If you invested that same amount for 25 years instead of 5, the compounded return would amount to $68,484.75 compared to the simple return of just $30,000. In that 25th year of compounding, you earned $5,072.94 in interest! 

Here is a link to my favorite compound interest calculator. 

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$10,000 Invested, 8% Compound Interest www.investor.gov

“That’s great! But I don’t have $10,000 to invest.” – You

Here is one of the other great parts about compound interest. You can earn compound interest and experience this growth acceleration by investing a little bit each month over time. In this video, Ryan Scribner will show you how you can become a millionaire by simply investing $5 a day.

Rich people understand the power of compound interest, and they have likely been applying it for years. You might be wondering why so many rich people seem to have an endless supply of money. It is simply because they started investing their money and allowing that money to grow into more money over time. They understood the power of compound interest early on and they had the patience to see it through.

The number one skill you need to have in order to get rich is patience. Compound interest will not make you a millionaire over night. Earning compound interest is about as exciting as watching paint dry on a wall or grass grow in your lawn. Nobody became a millionaire overnight by investing in a low fee index fund. It takes time, patience and regular contribution!

On the other side of the coin, compound interest can be your enemy. Consider the credit card in your wallet. The debt on that credit card can compound in the same way that you can earn compound interest.

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“State of Credit: 2017” www.experian.com

Let’s say you have a $5,000 limit on that credit card and you made the unfortunate mistake of maxing it out. Your interest rate on this card is a staggering 22% and you are making a payment of $100 a month.

Pop quiz!

First, how long will it take you to pay off this card?

And second, how much did you pay in total in interest and principal?

Don’t worry, if you are like most people you can’t answer this. It seems like something that would have been useful to learn in school, but I guess Hamlet was more important.

If you were paying off $5,000 in debt with no interest at $100 a month, it would take you just 50 months to pay off that debt. If you were paying off $5,000 in debt at $100 a month with 22% interest, it would take you 137 months to pay off that debt.

Here is how I found this out.

To answer the second question, you would pay $5,000 in principal and $8,678 in interest at a total of $13,678!

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Credit Card Payoff Calculator www.bankrate.com

Would you rather roll a boulder uphill or downhill? Earning compound interest is like rolling a boulder downhill. Paying off compound debt is like rolling a boulder uphill. As we said before, compound interest does not discriminate. It can be your best friend or your worst enemy.

How To Earn Compound Interest

There are many ways that you can earn compound interest. Some of these methods are better than others, as you will see going through the examples. Interpreting compound interest rates can be confusing, so we are going to use the rule of 72 instead.

The rule of 72 is a great way to understand the power of the return you are getting. You simply take the number 72 and divide it by your average annual return. If you had a return of 5%, you would take 72 and divide it by 5 which comes out to be 14.4. What does that 14.4 mean exactly? It tells you that at a 5% compounded return, you would double your money every 14.4 years. The table below demonstrates the rule of 72 in action.

Interest RateYears To Double
2%36 Years
4%18 Years
6%12 Years
8%9 Years
10%7.2 Years
12%6 Years
14%5.1 Years

Moving on now, let’s discuss a few ways that you can earn compound interest.

1. Bank Account

While this is the worst way to earn compound interest, the interest earned from a bank account is compound interest. With a Savings Account, Checking Account, Money Market or Certificate of Deposit, you can earn compound interest.

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People walking by TD Bank, www.bankrate.com

The table below demonstrates why this is actually the worst way to earn compound interest. On top of that, you would not be able to outpace inflation earning interest rates this low and you would be losing the buying power of your money!

Account TypeInterest RateYears To Double
Checking 0.05%1,440 Years
Savings0.05%1,440 Years
Money Market0.1%720 Years
Certificate of Deposit1%72 Years

I don’t know about you, but I need to double my money more frequently than every 72 years or more. Let’s go ahead and discuss some other methods of earning compound interest.

2. Stock Market

Investing in the stock market is one of the best ways to earn compound interest. If you are interested in learning more, check out our beginner’s guide to investing in the stock market!

With the stock market, higher risk yields a higher reward potential. Long term stock market investors can expect an average return of 10%. It is important to remember that you will not see this type of return every single year! This is the average return experienced over a long period of time.

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NASDAQ Display, Wikimedia

At a 10% return, you would double your money every 7.2 years. This is why compound interest is referred to as the time value of money. A young person would be able to experience more of these doubling cycles than an older person. This is why it is imperative that you get started early. If you are a young person reading this, you have a huge advantage because time is on your side!

Another way you can earn compound interest is through dividends. Dividends are regular cash payments paid out to shareholders. A company can decide to retain earnings or share the earnings with shareholders in the form of dividend payments.

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Coca Cola (KO) Revenue, EPS and Dividends www.nasdaq.com

When you are investing in a dividend stock, you have two options. The first option is to receive these dividends in cash. The second option is to reinvest these dividends. Reinvesting your dividends allows you to earn more dividends from your dividends (the same thing as earning interest on interest).

Not all investing platforms are created equally!

Most of these investing accounts charge a fee to reinvest your dividends back into the issuing stock. If you are looking to earn compound interest through dividends, you should consider investing with M1 Finance. This platform allows you to reinvest your dividends for free!

Read our full review of M1 Finance here.

Failing to reinvest your dividends can be detrimental to your wealth. If you are currently getting dividend checks in the mail, you should contact your broker and inquire about a dividend reinvestment plan. If your broker does not offer this, it might be time to shop around.

3. Real Estate

Another common way that people earn compound interest is by investing in real estate. Consider a flipper for example. This is a type of real estate investor who buys a piece of real estate, fixes it up and sells it for a profit.

In Year 1, they invest $100,000 in a piece of real estate. They fix it up and after expenses they make a profit of $15,000 on the flip. This investor made a return of 15%.

In Year 2, they invest $115,000 in another piece of real estate. They fix it up and they earn another 15% return, but this time it is a profit of $17,250!

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Man repairing a house, www.howstuffworks.com

At a 15% return per year, you would double your money every 4.8 years. Riskier investments have a higher potential return, and higher return investments will have a shorter doubling cycle.

One of the problems with investing in real estate is that it typically requires a high upfront capital investment. If you are looking to own a two family home, get ready to put down $10,000 or more!

Fundrise has come up with an interesting solution to this problem. Thanks to modern day technology, people from all over the world can pool their money together to invest in real estate projects. There are a number of advantages to this. First of all, the minimum to get started is just $500 making the barriers to entry significantly lower. Second of all, you are investing in a diversified pool of real estate and not just one property.

If you own a two family house and one of the units goes vacant, you just lost 50% of your rental income from the property. If you and 1,000 other people collectively own 10,000 units of real estate all over the world, one vacancy will not make a difference. That is the beauty of diversification.

Fundrise is a great investment option for earning compound interest!

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Fundrise Returns, 2014 To 2017

Click here to learn more about Fundrise. 

Another way that people earn compound interest is through running a business. This is very similar to the real estate example above. For example, let’s say you had an Amazon FBA business and you were investing in inventory. Your initial investment could yield a 20% return or more, and the profits could be reinvested in more inventory yielding a greater return.

For most people, the best way to earn compound interest is through investing in the stock market. This is going to be the most passive method, as flipping real estate and running a business will be time consuming. It is important to remember that the most important factor when it comes to earning compound interest is time. While having a large amount of capital does help, it is not necessary. You can build a serious amount of wealth for yourself through small contributions on a consistent basis over time.

 

 

 

 

A Beginner’s Guide To Investing In The Stock Market

Most people believe they have a choice when it comes to whether or not they decide to invest. The truth is, you don’t. At some point, you need to start investing your money and saving for the future. You could be reading this as a 20 year old (lucky you) or someone who put this off until their 40s or 50s. Regardless of your age and financial situation, you need to be participating in some kind of investment to allow your money to grow into even more money.

“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb

Now, does this have to be a stock market investment? Absolutely not. Here at Investing Simple, we discuss all kinds of investments such as passive real estate investments, peer to peer lending and more. However, for the purpose of this article we are going to assume that you are interested in investing in the stock market.

At a time when consumer debt is at all time highs and stock market participation is at all time lows, I applaud you for reading this and considering entering the realm of investing. You might think the first step is to figure out what brokerage account to use and to start picking stocks. This is actually not the best way to do it. Some of you that are reading this might be ready to invest, but I am guessing most of you have a little personal finance clean-up work to do.

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“The State of the American Debt Slaves” www.wolfstreet.com

Phase 1: Pay Off Debt

Let me ask you a question. Let’s say you have $100 in the bank, but you also owe your friend $100. Your friend Bill is charging you $1.50 each month until that $100 is paid back. Now, your friend Jack calls you up and asks you if he can borrow $100. He agrees to pay you $0.50 a month until he is able to pay you back that $100.

Should you…

A. Keep that $100 in the bank

B. Pay back your debts with Bill

C. Loan your money to Jack

If you picked Choice A, this is actually the worst move you could make. Your money is sitting in the bank earning a very small rate of return. For most people, this is a rate that does not outpace inflation. Your first goal when it comes to investing is to protect the buying power of your money by outpacing inflation. If you didn’t take economics class in high school, inflation is an increase in prices over a period of time. As prices increase, the buying power of each dollar decreases. To explain this simply, bread is more expensive now than it was back in 1930.

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Price data from www.thepeoplehistory.com and www.nationmaster.com

In recent years, inflation has been at a rate of around 2 to 3% per year. The average interest rate on a US savings or checking account is around 0.05% per year. Assuming these figures remain the same, let’s take a look at how this plays out. Let’s assume you have $100,000 sitting in a US checking account. A dollar today is worth more than a dollar tomorrow.

$100,000 Now = $98,000 1 Year From Now (2% Inflation)

Thanks to our friend inflation, your $100,000 will only buy you $98,000 worth of goods next year.

$100,000 Saved = $100,050 1 Year From Now (Is it really?)

Thanks to the “generous” interest rate paid by your bank, your $100,000 grew in value by $50! But since inflation was 2% and your return in your bank account was only 0.05% you really lost 1.95%

So what exactly happened here? You earned a return of $50, but you lost $2,000 worth of buying power. Your net loss was $1,950!

This is what people are talking about when they mention “outpacing inflation”. All investors look for investments that will either keep pace with or outpace inflation in order to maintain their purchasing power!

One of the best comparisons I have heard is that inflation is like having termites in your house. Day by day, it goes unnoticed. The real damage is done over a long period of time.

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Termites, Insight Pest www.flickr.com

So what exactly happened here? You earned a return of $50, but you lost $2,000 worth of buying power. Your net loss was $1,950!

Keep this in mind when your friends or family members tell you they keep their money in the bank because it is safe. Termites!

If you picked Choice B, you chose the best option! It does not make any sense to loan your money to Jack when you owe Bill money. Now, you might argue that this could make sense if you could get a higher rate of return than you are paying in interest. This is something people try to do with the stock market. They borrow money against the shares they already own and they invest that borrowed money. This is known as buying on margin, a key contributor to the stock market crash in 1929.

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Man selling his car, unknown source

On average, the stock market has averaged a return of 8 to 10% per year. This is the average, meaning you will not experience this every single year! In a bull market (a time when the price of stocks is rising), you could see returns of 15% per year or more. In a bear market (a time when the price of stocks is falling), you could see a 20% loss or more.

Buying on margin and investing borrowed money is a result of two things. First of all, it is a result of impatience. You are trying to accelerate your wealth and possibly make up for lost time. While I am not a financial advisor, I have yet to meet a single one that recommends that its clients invest borrowed money. Second of all, it is a result of not understanding compound interest. Einstein called this the 8th wonder of the world for a reason. Warren Buffett attributes a lot of his success to it. It is imperative that you understand the power.

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www.suredividend.com

In this video, Ryan Scribner explains how you could become a millionaire with just $5 a day thanks to compound interest.

I encourage you to play around with a compound interest calculator if you haven’t yet.

Here is a link to one.

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Compound Interest Calculator www.investor.gov

If you picked Choice C, you made a very common mistake. Most people are so excited about investing in the stock market that they do not consider their personal finances and whether or not it actually makes sense to invest at this point in time. As we mentioned above, the average return from the stock market is around 8 to 10% per year. Just to restate this, you will not experience this kind of return every year!

The most common debt people have is credit card debt. Since this is unsecured debt, it typically has the highest interest rate. It is not uncommon for people to have a 20% or higher interest rate on a credit card. If you have credit card debt, you need to pay it off before investing in the stock market. It is no different than loaning $100 to Jack when you owe Bill $100. The best return you can get at this point in time will be from paying off your high interest debt.

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“State of Credit: 2017” www.experian.com

As a general rule of thumb, you want to pay off all debt that exceeds your anticipated rate of return from your investment. If that is 8%, you want to pay off all debt near, at or above 8% interest.

Now, what about a car loan or a mortgage? These are secured loans, so the interest rates are typically much lower. For example, if you are paying 4% interest, it would make sense to invest.

Let me give you an example. Let’s say you have a car loan of $20,000 but you also have $20,000 in the bank. You have good borrowing history, so your interest rate on this car loan is 4% per year. Rather than pay off your car loan, you decide to invest that money. Your anticipated rate of return is 8% over the next year.

Interest Paid = $800

Investment Return = $1,600

Net Gain = $800 or 4%

You were able to earn a return that exceeded what you paid in interest. On top of that, you were able to build your credit in the process.

In this video, Ryan Scribner talks about whether or not you should invest while being in debt. The same concepts are explained!

Summary: The point is, you do not need to be debt free to start investing. You just need to use common sense and pay off any high interest debt first. It does not make sense for most people to borrow money to invest. Buying on margin was a key contributor to the stock market crash of 1929, and I have yet to meet a financial advisor that recommends their clients invest borrowed money. Some debt is okay, as this will help you build your credit score. While the stock market historically returns 8 to 10% per year, this should not be expected every single year.

Phase 2: Eliminate The Need For Debt

Why do people go into debt? Sure, it could be compulsive spending or keeping up with the Joneses. However for a lot of people, debt is a result of an expense that was not anticipated or planned for. This could be something like a car repair or a medical bill. Once you have committed to being a participant in the stock market, you have hopefully followed the steps outlined in Phase 1. Unfortunately, the next step is not to go on a stock shopping spree. The next step is to eliminate the future need for debt.

Most people don’t plan on going into debt. You don’t wake up on a Saturday morning and say “I want a $3,000 credit card balance.” However, most people do not plan for unexpected expenses. Here is a tip: Don’t be like most people.

I am a big fan of Dave Ramsey. If you are still in the phase of paying off debt, I would highly recommend watching some of his videos.

The next step is to build up an emergency fund. This is going to eliminate the need for debt in the future. A general rule of thumb for this is that this should be enough to cover all of your expenses for the next 6 months. Pretend you lost your job or main source of income tomorrow. How long would you be able to sustain yourself before you needed to grab your credit card? If the answer is anything less than 6 months, you need to build up your cash cushion.

Let me give you an example. John has the following monthly expenses.

Car Payment = $300

Mortgage = $1,200

Utility Bill = $150

Food = $500

Entertainment = $200

Other = $200

Total = $2,550

John should have an emergency fund that covers all of his expenses for the next 6 months, or around $15,000. This money should be sitting in a liquid account like a checking account or a money market account. This money should not be invested. You might be saying that $15,000 is a lot of money. You are right! It would take most people at least one year to save up that amount of money. What you could do instead is invest half of your money and save the other half for your emergency fund. This would allow you to participate in the stock market while improving your financial situation.

“Wait a second, you just told us above that inflation is like termites and it is eating our money! Shouldn’t we invest our emergency fund?”

Here is another Dave Ramsey classic on the emergency fund.

Let me show you exactly why you should not do this. Let’s assume you buy shares of a red hot technology stock. You picked up 10 shares at a cost of $250 per share. In doing this, you drained your checking account and left yourself with $500 until payday. You picked up your shares the day before this company is reporting earnings because you anticipate that this stock will beat expectations. When this happens, the share price can go soaring!

The next day, they report earnings that fall short of expectations. The stock drops 15% on the news. Your initial investment of $2,500 (10 shares at $250) is now worth $2,125 (10 shares at $212.50). You “lost” $375. To tell you the truth, you didn’t lose a penny. You do not recognize a loss until you sell those shares to someone else at a price that is lower than what you paid for them. Often times, people will say that the stock market is a scam or that the stock market took money from them. As if the stock market reached into your brokerage account and plucked the money out! The stock market never took a penny from anyone. If you lost money, you handed it over.

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After earnings, AMD stock fell 24.4% in one day! www.marketwatch.com

Back on topic here, you are now down 15% on your shares of this red hot technology stock and you have $500 in checking. After listening in on the earnings call, you decide to go grab breakfast. You walk out to your car, turn the key and hear clicks. After punching the steering wheel a few times, you call a tow truck. Your car repair and tow bill ends up costing you $2,000! This was clearly an unexpected expense and like most people, you did not plan for it. Here is a tip: Don’t be like most people.

At this point, you have two lousy options.

Your first option is to sell your shares of the red hot technology stock and recognize the loss. You will use this money to pay for your car repair bill. On top of that, it will take 3 business days for the funds to settle before you can transfer the funds back to your bank account.

Your second option is to pull out that shiny credit card and slap on a $2,000 repair bill and tow at a 20% interest rate.

Both of these options are bad. If you end up in this situation, flip a coin.

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Credit Card Interest Rates www.creditcards.com

Summary: Most people do not plan on going into debt. Usually, debt is a result of a lack of planning. An emergency fund will eliminate the future need for debt. A general rule of thumb is that you should have enough money in a liquid account like a checking account to cover all of your expenses for the next 6 months. You can contribute to your investing account as well as your emergency fund at the same time. Your emergency fund should not be invested.

Phase 3: Your First Investment

Have you ever seen a horse race before? Don’t worry, this will make sense shortly. People spend hours upon hours analyzing the horses and the different variables involved. Then, the horses go off and the fastest horse is the winner. No matter how much research is conducted by the handicapper, they are frequently wrong about what horse will come in first. Is this due to a lack of intelligence or research? In most cases, no. It is because horses are horses and sometimes they just don’t feel like running. But what if instead of picking the winner of this race, you were able to make a different bet on all of the horses? That’s right, you are betting on the outcome of the entire race and not just one horse.

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Horse Racing www.wikimedia.com

This is exactly how stock picking works. Everyone has their own strategy when it comes down to the analysis of the investments, but at the end of the day nobody knows how the market will perform and what stocks will come in the lead. While you can’t bet on the entire horse race, you can bet on the entire stock market with an investment known as an index fund.

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Who is right? www.christinecantrell.com

An index fund is a pool or collection of different stocks designed to replicate an underlying benchmark. This benchmark could be the S&P 500, foreign telecommunication companies or even the entire global stock market. This fund is designed to replicate the performance of the underlying benchmark as closely as possible.

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Vanguard S&P 500 Index Fund “VOO”

It is important that you understand the difference between the index fund and the distant relative known as the mutual fund. A mutual fund is actively managed, and the expenses associated with this type of investment are often significantly higher. The truth is, most actively managed mutual funds do not beat the market. Mutual funds are often benchmarked against the S&P 500, an index that tracks the performance of the 500 largest publicly traded companies in the US. What most people do not realize is that you can simply invest in the S&P 500 through a low fee index fund instead of trying to pick stocks or pick a mutual fund that will hopefully outperform.

In fact, Warren Buffett recommends that people simply invest in a low fee S&P 500 index fund! One example of this is the Vanguard 500 Index Fund. You can invest directly into this fund through Vanguard, or you can purchase shares on the market through a financial instrument known as an ETF. This is simply an exchange traded fund. Shares of this fund trade openly on the market under the symbol VOO.

Most people should just buy low fee index funds. Now, am I telling you this to deter you from going out and picking stocks on your own? Absolutely not. It is possible to beat the market and you can learn a lot by investing in individual stocks. However, if you are brand new to investing you should start with an index fund. It is in your best interest to build your tolerance for risk and your understanding of the stock market before you begin to hold individual stocks. By holding ETFs, you get to experience what it is like to be a stock market investor without holding individual stocks that can be volatile.

In this video, Ryan Scribner talks more about index funds and ETFs.

Volatility is the degree of variation seen in the price of a stock. Individual stocks are far more volatile than the overall market, meaning you will see more drastic price fluctuations. One of the easiest ways to determine the volatility of a stock that you are looking at is to look at the beta. If a stock has a beta above 1, that means this stock is more volatile than the overall market. If the beta is below 1, that means this stock is less volatile than the overall market. If you are investing in individual stocks as a complete beginner, you should consider investing in stocks with a beta below 1.

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UnitedHealth, Low Beta/Volatility
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Chesapeake Energy, High Beta/Volatility

Some stocks are inherently more volatile than others. For example, a technology stock like Advanced Micro Devices is going to see more variation in the share price than a blue chip stock like Coca Cola. These durable, time tested investments are named blue chip stocks after the blue chip in poker. The blue chip is the poker chip with the highest value. If you are looking to invest in an individual stock as a beginner, you should familiarize yourself with these blue chip stocks. A great place to start is the Dow Jones or DJIA. This is a list of 30 well established, financially responsible industry leaders. This includes companies like Apple, 3M and UnitedHealth.

If you want to participate in the stock market without picking individual stocks or building a portfolio from scratch, check out the platform Betterment. This is a roboadvisor that will build you a portfolio from scratch based on your age, time horizon, goals and risk tolerance. In most cases, betterment is a great option for beginners because they do not have any minimum account balance to get started. Betterment provides a completely passive approach to investing in the stock market. Betterment allows you to bet on the outcome of the entire race by investing in low fee index funds. Instead of building a diversified portfolio yourself, Betterment does it for you.

Here is our full review of Betterment.

Summary: For most investors, especially beginners, your best option is to invest in low fee index funds. This will give you diversified exposure to the stock market. Warren Buffett recommends this too! If you do decide to invest in individual stocks, you should consider the beta or volatility of these investments. As a beginner, you should avoid stocks that have high volatility. 

Phase 4: How To Make Money

When it comes to investing in the stock market, there are two different ways you can make money. The first way you can make money is through asset appreciation. You purchase a stock and hopefully sell it at a higher price in the future. It is important to remember that share prices can be completely erratic, and you should always invest in a company you fully understand. Consider the investing style of Warren Buffett. He invests in simple businesses like Kraft Heinz, American Express and Coca Cola. There is a lot of temptation out there to invest in complicated industries like biotechnology. At the end of the day, you need to ask yourself one question. Do I understand what I am buying?

DIVERSIFIED INVESTMENTS
Warren Buffett’s Investments (Berkshire Hathaway)

The second way that you can make money in the stock market is through dividends. Companies can decide to share a portion of their earnings with shareholders through dividends. These dividends are typically paid on quarterly basis, but in some instances companies pay annual, semiannual or quarterly dividends. It is important to understand that these dividend payments are never guaranteed. A company that pays a dividend can cut or cancel this dividend payment at any time. Generally speaking, companies like to increase dividend payments over time and avoid a dividend cut at all costs. A dividend cut almost always results in a decline of the share price, which hurts the reputation of the company.

In this video, Ryan Scribner explains how money is made in the stock market.

Stocks that pay dividends are referred to as income stocks. Stocks that are growing at a faster rate than the overall market are referred to as growth stocks. You will also find that there are some stocks that are both growth and income investments. The company pays a dividend and it is also experiencing a faster rate of growth than the overall market.

You also have conservative growth stocks and aggressive growth stocks. As the name suggests, aggressive growth stocks are likely to experience a higher growth rate than conservative growth stocks.

When you begin investing in the stock market, it is important to consider what type of investor you want to be. Do you want to invest in aggressive growth stocks? Do you want to invest in durable blue chip stocks that pay dividends? Do you want to invest in stocks that pay dividends while also having growth potential? Like anything else out there, it is important to have a game plan and a strategy. A dividend investor would be focused on companies with a consistent operating history and a durable competitive advantage. A growth investor would be focused on what the most innovative companies are. Determining what type of investor you are is above and beyond the scope of this article, but you should begin to think about what type of investing seems most appealing to you.

horse race new
Horse Racing www.wikimedia.com

Remember, if this seems too overwhelming you can always bet on the outcome of the entire race! This is why many investors simply invest in index funds rather than bother with picking individual stocks. If you are bullish on a particular sector or industry, like semiconductor technology, you can invest in a sector or industry specific ETF. You have no idea what the top performing semiconductor stocks will be, you just believe in that industry as a whole.

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Semiconductor Sector ETF “SOXX”

Summary: People make money in the stock market through asset appreciation or income from dividends. It is possible to invest in stocks that will offer both. Income investors buy shares of companies that pay dividends on a consistent basis. Growth investors buy shares of companies that are highly innovative and adaptive. It is important to understand what type of investor you want to be. 

Phase 5: Core Investing Principles

There are a number of core investing principles that you should know before you begin investing in the stock market. You should also refresh your memory once in a while to ensure that you are following them. Here are the cardinal rules to sensible investing that will help you stay out of trouble.

Buy Low, Sell High

This is the most important investing principle, yet so few actually practice this. Let me give you an example. In 2017, Bitcoin went mainstream. Cryptocurrency was the topic of bar room conversations all over the world. By the time the average person learned about Bitcoin, it was trading at a price of over $10,000 per coin. Looking at the chart, you could see that Bitcoin had gone nowhere but up.

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Bitcoin Bubble www.coindesk.com

At this point, FOMO was triggered. Also known as the fear of missing out, masses of people entered the cryptocurrency market because they were afraid of missing out on the hottest investment. Do you know what all of these people did? They purchased Bitcoin at all time highs. To the untrained eye, Bitcoin had nowhere to go but up. Seasoned investors knew that the opposite was true. Whatever it is that you are buying, do not buy it at all time highs. People who are new to investing are often cautious about buying low. They see that the share price has fallen and they are afraid to buy. If you went to the grocery store and found out that Tide laundry detergent was on sale, you would stock up and buy extra. But when Procter & Gamble stock goes on sale, the maker of Tide laundry detergent, people are afraid to buy it. Stocks are the only thing that people do not buy on sale.

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Notable “PG” Stock Sales, Last 5 Years

Ignore The Noise

When it comes to investing, noise is everywhere. There is always a line of people waiting to give you their opinion regardless of whether or not you wanted to hear it. To some extent, you can control the noise. Most of it is coming from the news outlets. Keep in mind that Wall Street makes money when you are active. Activity leads to trading and trading makes your broker money. Wall Street wants you to be active. They want you to invest in a stock on Monday and change your mind Thursday, sell it and buy something else only to sell that Friday. There is a difference between staying informed about your investments and being obsessed.

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The Grinch www.toontalkweekly.com

Check on your stocks once a day, maybe twice. Keep track of the major company announcements, quarterly earnings reports and annual reports. Beyond that, the rest is just noise. While investing in stocks can be a social activity, you should be careful about where you get your advice from. Hot stock tips are a dime a dozen. Beyond that, even if they are right about their hunch, what is your next move? Is your plan to wait for someone else to give you a stock tip at the bar? That is not an investment strategy. An investment strategy needs to be scale able and repeatable.

The Stock Market Is A Pendulum

A man by the name of Benjamin Graham once said that the market is a pendulum, forever swinging between optimism and pessimism. Warren Buffett learned a lot from Benjamin Graham. For example, Buffett has said that you should be greedy when others are fearful and fearful when others are greedy. Optimism leads to greed and pessimism leads to fear. Buying from the pessimist means that you are buying stocks when there is fear in the market, or buying low. Selling to optimists means that you are selling stocks when there is optimism or euphoria in the market, or selling high.

MARKET PENDULUM.jpg

If you hear everyone talking about a hot stock, it is probably time to sell it. The underlying value of a stock does not change in the short term, only the price does. At some points, the price is high due to greed and feelings of euphoria. At other points, the price is low due to feelings of fear.

Don’t Put All Your Eggs In One Basket

If you are completely new to investing in the stock market and you want to place a bet on the stock of one company, I understand where you are coming from. As a beginner, you likely do not have a lot of capital to invest or you are just looking to get your feet wet with investing. It doesn’t make a lot of sense to try to diversify when you are investing a small sum of money. Diversification becomes more important as you invest more money.

For example, if you are simply looking to invest $1,000 diversification might not make a lot of sense at this point. Once you have invested $10,000 or more, you should consider diversifying. There are a couple of different rules of thumb you might want to follow. One of my favorite ones is never to have more than 20% of your money in any one thing. Some would argue that even investing 20% into one stock or asset is too risky. This all comes down to your individual risk tolerance.

What you are trying to avoid here is placing an all in bet. While it may be tempting to let it all ride on one particular stock, most would agree this is not a great strategy. If you are correct about this all in bet, the situation gets even worse as you fall under the hot hand fallacy. You will likely now believe that you have some skill above the ordinary investor and you will begin placing one all in bet after another and letting it all ride. At some point, your luck will run out. If you placed all in bets in the past and ended up ahead, consider yourself lucky and understand it is likely in your best interest to diversify.

Here is a great video by Fidelity that explains diversification.

Now, on the other hand, you do not want to make the mistake of being too diversified. Often times, a beginner investor mistakes diversification with buying dozens of different stocks. I can remember having a discussion with someone who had a portfolio of $5,000 and somehow was holding stock in 57 different companies. In most cases, he owned just one share. I asked him how he was able to keep up with all of those earnings reports and interviews. He told me he was not able to keep up with earnings and lost track of what he even owned. This is not diversification. This is stupidity.

My rule of thumb is to own 5 stocks at a time. Some people own more and some people own less. I find it is easy enough to keep track of all of the important information surrounding 5 companies. As an investor, you are a part owner of this company and you should be staying up to date on what is going on with the company. This means listening in on conference calls, reading quarterly earnings reports, keeping track of management changes and more. Being an informed investor takes time.

If you are looking to build a well diversified portfolio with a small amount of money, take a look at M1 Finance. This brokerage account allows you to invest in fractional shares of a company. In doing so, you can invest in as little as 1/10,000th of a share of a stock. This gives investors the ability to build a well diversified portfolio without investing $10,000 or more.

Here is our full review of M1 Finance.

Low Share Price Does Not Equal Cheap

Valuing a stock is a complicated process. People have written entire books on strategies for determining the underlying value of a stock. This is a beginner’s guide, so I will not be going into great detail about this but it will be mentioned later. What I will tell you is that the share price has absolutely nothing to do with how cheap or expensive a stock is.

A lot of beginners make this fatal mistake when it comes to investing in the stock market. They see a stock like Amazon trading for close to $2,000 a share (as of October 2018) and they see these other companies trading for under $1. If they have $2,000 to invest, they can buy 1 share of Amazon or over 2,000 shares of this penny stock. What a bargain, right?

Wrong. In order to understand why this is not the case, we need to define a few important terms…

“Market Capitalization” – What the market has valued this company at.

“Shares Outstanding” – Total number of shares available.

Market Capitalization = Shares Outstanding X Share Price

Consider the following example. Company A issued 1,000 shares of their stock and the market has valued this company at $100,000. This gives each of these shares of Company A a value of $100. Company B on the other hand issued 100,000 shares of their stock and the market has valued this company at $100,000 as well. This gives each of these shares of Company A a value of $1.

Company A: $100,000 Market Cap = $100 X 1,000 Shares

Company B: $100,000 Market Cap = $1 X 100,000 Shares

The share price has nothing to do with whether or not a stock is cheap or expensive. It simply has to do with how many shares are available. Companies will often split the stock to lower the share price. Once a stock becomes out of reach for the average retail investor, the company will often split the stock in a given ratio. If you are holding a stock that splits, you will end up with more shares but the same ownership stake. Some companies, like Berkshire Hathaway, have never split their shares. Warren Buffett has stated he made this decision because he was looking to attract investors with similar goals as him. Eventually, Berkshire Hathaway decided to offer both BRK.A and BRK.B to provide retail investors with the option to invest. Most retail investors cannot afford to invest over $300,000 in one share of BRK.A!

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Berkshire Hathaway Class A Shares

Stocks Are A Long Term Investment

Not everyone will agree with me on this, but I share the same belief as Warren Buffett when I say that stocks are a long term investment. Warren Buffett believes that you should have a minimum time horizon of 5 years when investing in a stock. Investing with a time horizon of less than 5 years is speculation or gambling. You might be wondering about those who are trading stocks on a daily or weekly basis. I am a long term investor and that is my area of understanding. I do not know much of anything about short term trading. When I began investing, I tried my hands as a swing trader and I learned relatively quickly that this was not for me. Trading is completely different than investing, and it takes a unique type of person to be a consistently profitable trader.

I had the opportunity to interview a trader on the channel named Jason Graystone. Jason is a Forex trader and he has been doing this for over a decade. This interview is dense, at a length of over an hour, but the insight on what it takes to be a successful trader is immensely valuable. In the interview, Jason talked about something called the 90-90-90 rule. This is a well known fact that 90% of traders lose 90% or more of the value of their account in the first 90 days of trading.

The success rate with trading is extremely low. Successful traders have a very high risk tolerance and they have complete control over their emotions and do not involve them with trading.

Here is the full interview with Forex trader Jason Graystone.

Personally, I invest with a minimum time horizon of 1 year. The main reason why I do this is for tax reasons. In the United States, capital gains on investments can be classified as long term or short term capital gains. Believe it or not, there is a significant tax advantage associated with being a long term investor. If you buy a stock and sell it within 365 days, the gains are classified as short term capital gains and taxed as ordinary income. If you buy a stock and hold it for longer than one year before selling it, the gains are classified a long term capital gains. Depending on what tax bracket you are in, this could result in a tax savings of up to 20%.

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Capital Gains Tax Rate

In the short term, the price of a stock is unpredictable. The market can be volatile at times and stocks can move up and down for seemingly no reason. If you are unable to stomach these hills and valleys, you should not be an individual stock investor. You are better off investing in index funds as they are typically much less volatile. When you invest in a stock, have an idea in your head what the time horizon is that you plan on holding it.

If your stock goes up in the short term, you might be tempted to grab these easy profits. In some cases, it makes sense to do this. Keep in mind however that in doing so you are likely exposing yourself to short term capital gains! You will be paying the highest tax rate possible on your profits.

Timing The Market Is Impossible

You will always hear people talking about timing the market. The principle behind this is simple; buy when the market is low and sell when the market is high. This is unfortunately easier said than done. Most investors would agree that time in the market will always beat timing the market. If you get out of the market when it is high and it continues to climb higher, you miss out on potential gains. Whenever I am asked about this, I always tell people to look at some of the greatest investors like Warren Buffett. Do you see Warren Buffett jumping in and out of the market, moving from 100% stocks to 100% cash? Absolutely not. If Warren Buffett wouldn’t do it, you probably shouldn’t either.

I am going to keep this section short because I have written about this topic in depth in another article. You can read it here.

Speculate With No More Than 5% Of Your Portfolio

One of the greatest books you will ever read on the stock market is a book by a man named Benjamin Graham. That book is The Intelligent Investor. In this book, Graham discusses at length the difference between an investment and a speculation. Here is how he defines these two…

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” – Benjamin Graham

If you insist on speculating with your money, in the words of Benjamin Graham, you should do so with no more than 5% of your portfolio. Beyond that, you should speculate in a separate account as to not confuse this with investing. Graham also recommends that you do not continue to funnel money into this speculative portfolio. Instead, you should simply reinvest the earnings from your past speculations. If you are correct on your bet, you can reinvest that money into another speculation. If you are not correct on your bet, you should not funnel more money into a losing strategy.

It is imperative that you understand the difference between an investment and a speculation. Personally, I consider investing in any company that is not turning a profit as a speculation. As an investor, you are taking a gamble on whether or not that company will achieve profitability before going bust.

I have made speculations in the past, and I will likely make them in the future. One of my first investments was a total speculation, and it (kind of) paid off. I invested in Advanced Micro Devices (AMD) when it was $6.82 a share in August of 2016. At the time, this company had just gotten past the possibility of bankruptcy. They had not turned a profit in years and this was a total speculation. Not long after, the stock climbed to $7.51 a share in September and I sold. I made a profit of $0.69 per share on 1,000 shares, or $690. Immediately after that, the stock shot up to the $10 range by December 2016. Dang it! I got back in buying 700 shares and rode it to just under $15 in March of 2017, locking in a profit of around $3,500. At this point, I thought I was a genius and I decided I would swing trade these price movements. AMD stock retracted to $13.62 a share in April and I jumped on it. After that, AMD stock did not touch that price for over a year. That ended up being dead money in 2017. While the market soared, AMD showed no signs of life. In early 2018, AMD stock got caught up in a nasty sell off and fell into the $9 range in April 2018. At that point, I decided I was done with this stock and I would sell it at a breakeven at the earliest opportunity. After holding it for over a year and experiencing a dip of close to 35% I wanted out. I sold AMD for what I purchased it for and breathed a sigh of relief. Within 2 months, AMD was trading at $30 a share.

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AMD Stock 5 Year Chart

There are a few important lessons to be learned from this…

  • Had I held on to my 1,000 shares at a cost basis of $6.82 and sold at $30 a share (highly unlikely by the way), I would have had a return of 340%. My initial investment of just under $7,000 would be worth $30,000. This would have been a long term capital gain as well, resulting in significant tax savings.
  • By taking easy profits off the table, I earned a total of around $4,200. Still, this was not a bad return. These capital gains were short term capital gains, meaning I paid the highest tax rate possible on them.
  • A stock can go dormant for months or even years and suddenly come back to life.
  • Stocks like AMD are incredibly volatile, and drastic price fluctuations are to be expected.
  • In most cases, your best option when investing is to do nothing and stay the course.

Summary: Most people make money in the stock market by buying low and selling high. This typically means staying away from the market high flyers. While these stocks are getting the most attention from Wall Street, they are also the most likely to become overvalued. As an informed investor, you want to formulate your own opinion surrounding your investments. You do not want to buy whatever analysts recommend and sell whatever they don’t. Wall Street encourages buying high and selling low, a losing strategy. As a long term investor, you need to understand that the market is a pendulum and it is forever swinging between unjustified pessimism and unsustainable optimism. If you are looking to buy a stock that is soaring, you should be patient and wait for that pendulum to swing back towards unjustified pessimism. You want to avoid putting all of your eggs in one basket by placing an all in bet on one or a few stocks. You should also consider having some cash as well as other assets outside of the stock market. As an informed investor, you understand that the share price has no correlation to the valuation of a stock. Stocks are a long term investment, and in the short term the price movements can be totally illogical. While timing the market seems like a good idea on paper, it rarely works out in practice. Most long term investors would agree that time in the market beats timing the market. If you plan on speculating, you should limit it to a small portion of your portfolio. Speculating should not be confused with investing.

Phase 6: Why Stock Prices Change

As soon as you buy a stock, the price begins to change. If you watch the live charts, you will see that the quotation price for any stock is always changing. Why does this occur? There are a number of different reasons why a stock price changes. Some of these reasons are normal occurrences while others are red flags. It is important to understand the difference and what to look for! While the price of a stock is changing on a minute to minute basis, the underlying value does not change. Value investors look to acquire stock in a company when the price is below the underlying value. By understanding the difference between price and value, you can unearth opportunities where the market has priced something wrong.

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Apple Stock Intraday

As you can see above, the price of a stock is always changing. On this day, Apple stock opened at $219.79 and traded at a high of $223.36 and a low of $218.94. Every few seconds, the price at which people will buy and sell Apple stock changes. Do you think the value of Apple as a company changes every few seconds?

1. Earnings Reports

One of the most common catalysts for a price change is an earnings report. Publicly traded companies are required to report earnings to shareholders on a quarterly basis.  On the days before and after earnings, you typically see more volatility. Wall Street analysts place bets on how they anticipate the company to perform that quarter. Typically, this is a bet on revenue and earnings per share. When you hear that a company beats earnings, it means that the actual figures came in above these Wall Street estimates. When you hear that a company misses earnings, it means the actual figures came in below these Wall Street estimates. Some companies offer guidance as well, which is forward looking earnings estimates. Changes to these guidance estimates can also result in drastic price changes in the share price. A company can raise or lower guidance based on their earnings data for the most recent quarter and anticipated sales.

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NASDAQ Earnings Calendar

Now, do not assume that beating earnings and raising guidance will result in an increase in the share price. Often times, the earnings beat is priced in and the positive news does not result in any price move. Betting on earnings is risky, and most investors would not recommend it. It is important to understand however that the share price typically has some drastic moves around earnings. As a long term investor, you should be more interested in the earnings report and earnings call. I encourage you to listen in on earnings reports as a well informed investor.

If earnings are positive and the share price moves, you should determine whether or not you feel the stock is fairly valued. Stocks can become overvalued very quickly as the herd moves in on a particular asset. If you believe the stock has become overvalued, you might want to consider selling off a portion or all. One of my favorite moves in this situation is to sell enough to cover my initial investment and let the profits ride. This is called playing on house money!

If earnings are negative, you could see the stock plummet. You should not sell simply based on the fact that the price went down. You should evaluate the fundamentals and see if there has been a drastic change. Here is a video I did talking about what to do when your stock crashes.

2. Dividend Changes

If you are an income investor or you are holding a stock that pays a dividend, you need to understand that changes to that dividend can result in movement of the share price. Remember, a dividend is never guaranteed! While companies like to continue paying and increasing quarterly dividends, it doesn’t always pan out this way. I experienced this with General Electric, one of my investments. I purchased the stock and a few months after I bought it, they announced a 50% dividend cut. Due to poor management of finances, General Electric was no longer able to pay this dividend. They were paying more in dividends than they were earning. After the cut was announced, the stock took a major dip.

Typically…

  • A dividend cut will result in a price drop
  • A dividend increase will result in a price increase
  • A first dividend announcement will result in a price increase

Remember, this will not always be the case! The market is moody and erratic, and this leads to pricing that can be totally illogical at times. As a dividend investor, you want to keep track of the coverage ratio of your dividends. There are a number of different ways to calculate this, but this is the method I prefer:

Dividend Coverage Ratio = EPS / DPS

You want to take the earnings per share paid out over the last four quarters and divide it by the dividends per share paid out in the same timeframe. You will end up with a number that represents the dividend coverage ratio. If that number is below 1, it means that this company is paying out more in dividends than they are earning. This is a huge red flag as a dividend cut is almost guaranteed to occur. If the dividend coverage ratio is between 1 and 1.5, you should be careful. While a cut might not be immediate or necessary, this company has slim overage of the dividend. Ideally, I look for a coverage ratio of 1.5 to 2. This indicates that the company is retaining enough earnings to maintain financial health. On the other hand, if the dividend coverage ratio is well above 2 this can indicate that the company is retaining earnings and holding them back from investors.

For example, let’s calculate the coverage ratio of a popular dividend stock AT&T.

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AT&T Data From NASDAQ

In 2017, AT&T paid out $1.97 in dividends on $4.76 earnings per share. The coverage ratio would be $4.76 divided by $1.97, or 2.4 indicating a heathy dividend. In fact, based on these earnings figures the dividend could even be raised. So far in 2018, AT&T has paid out $1 in dividends on $1.56 earnings per share. This is a coverage ratio of around 1.6, indicating a healthy dividend payout. You want to look at multiple years of data when using and calculating the dividend coverage ratio.

3. Products

If your company is selling a product, understand that product announcements or recalls can result in a price change. Take GoPro for example. They planned on getting in on the drone market, but after months of development they pulled the plug on the operation. Investors were not happy and the price of the stock fell. A few years back, Chipotle had a recall of lettuce that had traces of e coli bacteria. While only a few dozen people got sick, this still has hurt them to this day. Physical product recalls typically have the same effect on a stock. Finally, new product announcements can result in a price move. Take Apple for example. Each year, they unveil the latest and greatest products. Wall Street essentially votes on whether or not they like the products with their money. If they love the new products, they buy. If they hate them, they sell.

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GoPro Karma Drone Nightmare

As an informed investor, you should pay attention to any upcoming product announcements and anticipate price moves around these announcements. Apple has been releasing new products for decades and they have mostly pleased investors with their new ideas. Sometimes, a recall can result in a buying opportunity for investors. If you feel that the recall is not as severe as everyone is saying, this could be a good time to buy shares. In most instances, Wall Street overreacts to bad news.

4. Layoffs

Layoffs are not always a bad thing, but Wall Street typically thinks they are. If a company announces layoffs, you will often times see a sell off take place. Layoffs and consolidation efforts are not always a bad thing. A lot of businesses operate in a cyclical industry. This means that sales can be great at some points and poor at other times. If they are approaching the slow end of the business cycle, layoffs might be a very logical move.

On the other hand, layoffs often indicate consolidation and shrinking. It is similar to when stores close locations in an effort to save money. By closing stores, they have reduced their footprint and they have less retail locations to move product. This almost always results in fewer sales. If a company has massive layoffs, this could significantly reduce the innovation and research within the company. This almost always results in falling out of favor in the market.

5. Acquisitions

Acquisitions almost always result in price moves. If you are holding a stock that gets acquired, you are typically having a good day. In most instances, the acquisition is seen as a positive. However, it is not always the case for the company that is acquiring the other company. Take AT&T for example. This year, they acquired Walt Disney. On the day that the deal was closed, the stock took a hit. The reason behind this was that investors were not happy with AT&T taking on more debt. As you can imagine, there are always different ways to interpret the news of an acquisition.

Public companies can also be taken private during acquisitions. Take Panera Bread for example. Back in April of 2017, a German company called JAB Holdings announced the acquisition of Panera Bread. They would be buying out the company and taking it private at $315 per share. If you were a shareholder at the time, you would have received $315 per share of Panera stock you owned. Companies typically pay a takeover premium when acquiring a company. This is expressed as a percentage above the current market value. When JAB Holdings purchased Panera, they paid a premium above the current share price. As a result, this is almost always good news for investors when a stock they own is taken private.

6. Stock Split

A stock split is typically something that is voted on, and it is becoming less and less common as years go on. Innovative brokerages like M1 Finance allow you to buy partial shares of a stock, making the need for stock splits virtually disappear. When the price for a single share of a stock climbs to a level that seems out of reach for the average retail investor, a company might decide to split the stock. Shareholders will receive more shares than they initially had in a ratio determined by the company. This is typically seen as good news, and new investors might decide to take a position in the company.

For example, on June 9th 2014 Apple completed a 7 to 1 stock split. Each outstanding share of Apple stock became 7.

Now, what we just mentioned above is a forward stock split. There is another type of split that is not desirable at all, and that is a reverse split. A reverse split occurs when a company needs to consolidate shares into fewer shares. Typically, this is done to fulfill listing requirements. Major stock exchanges like the NYSE and NASDAQ have a set of requirements a company must fulfill in order to remain listed on the exchange. If they do not meet these requirements, they can get delisted from the exchange. At that point, the stock would trade on a less desirable OTC exchange. A reverse stock split is seen as artificially inflating the price of the stock, and Wall Street is not a fan. This might be a confusing concept, so let me go through an example.

ABC Company has an initial public offering of 100,000 shares at $10 a share giving them a market capitalization of $1,000,000. In order to remain listed on a major exchange, they need to maintain a share price above $1. Everything possible goes wrong for ABC Company. They have a product recall, layoffs and earnings continue to miss. Two years after the IPO, the stock is trading at $0.55 a share. If they do not get the share price above $1, they will be delisted at the end of the year. Management has a discussion and they realize that the only option is to initiate a reverse split in a 5 to 1 ratio. The reverse split is voted on by shareholders and it passes. Now, each shareholder will receive 1 share per 5 they once had. Before the split, they have a market capitalization of $55,000 or 100,000 X $0.55 per share. After the split, the shares outstanding are reduced to 20,000 and the market capitalization does not change. As a result, each share is now worth $2.75 after the consolidation. Now, they can fulfill the listing requirements. The tricks do not fool Wall Street though, and the announcement of the reverse split results in a 5% sell off.

7. Management Changes

Management is like the captain of the ship that is a company. The management team determines what direction the company is heading in. Changes in management can result in price moves. Take General Electric for example. Recently, the new CEO was booted because the turnaround plans were not clear for this company. A new CEO was put in charge and Wall Street reacted positively to this change. On the other hand, if you suddenly hear about a member of management leaving the company this is usually a bad sign and Wall Street reacts accordingly.

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GE CEO Change, Stock Soars 15%

As an informed investor, you should be familiar with the company management. A change of management is one of the only times where I will consider exiting a position. Good management can take a company to the moon. Bad management can bury them. If you find out that a company has changed management and you do not like the new leader, it might be time to evaluate whether or not you want to be a part owner of this company.

8. Scandals, Illegal Activity, Accounting Errors, Data Breach

I am lumping all three of these together as they almost always result in a share price move to the downside. Here are a few examples…

9. Industry/Market Correction

Often times, a broad market correction is taking place. This could be entire global markets or just a correction taking place within one industry. If you suspect this is occurring, you should simply benchmark your stock to a market index. If both the broad market and your stock are seeing a correction, this likely has nothing to do with your company. If the broad market is moving ahead and your stock is taking a dip, this is probably a price move that is isolated to your company and it is definitely a red flag. Further investigation is required!

The rest of these catalysts for a price change are economic factors. They have little to do with individual companies, but they almost always have an impact on the broad market. Often times, these are the catalysts behind a broad market correction.

10. Interest Rates

Changes in Federal interest rates always have an effect on the stock market. When the economy is in a slump, the Federal Reserve will often lower interest rates to artificially stimulate the economy. Lower interest rates are passed on to the consumer and corporations are able to borrow money at a cheaper rate. As a result, spending increases and the economy moves forward. On the other hand, when the economy is roaring and inflation is getting out of control, the Federal Reserve can hike interest rates to pump the brakes. This discourages corporate borrowing and lowers overall spending. Lower interest rates result in lower operating costs for companies, inflating earnings. Higher interest rates result in higher operating costs for companies, deflating earnings.

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Federal Funds Rate

Interest rates also have an effect on the bond market, but that is above and beyond the scope of this article.

11. Unemployment

Unemployment is typically an indicator of how the overall economy is doing. In a prosperous economy, unemployment is low because companies are hiring left and right. In a poor economy, unemployment is high because companies are laying off employees left and right. Changes in the unemployment rate almost always have an effect on the overall market. Investors should pay attention to the unemployment rate and these jobs reports.

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Unemployment Rate, MarketWatch

12. Politics

Politics can have a huge impact on the stock market. When Trump was elected, the market went into a sell off as this news shocked the nation. Each political officer has an agenda, and changes to government policy can have a positive or negative impact on the economy. For example, corporate tax cuts under the Trump administration have had a positive impact on the overall economy as corporate earnings have soared. On the other hand, as of writing this article we are amidst a trade war with China. These decisions on policies for how the US and China will conduct trade will have a massive impact on the overall market. This trade war has resulted in a bear market in China as of late 2018. An informed stock market investor should have a general idea of what is going on with the government and policies being enacted.

This article is a work in progress, bookmark and come back often!

Last updated October 22nd, 2018. 

M1 Finance: What Is An Expert Pie?

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the roboadvisor and algorithm based trading have taken the brokerage industry by storm. One of the most established examples being M1 Finance.

M1 Finance is a pie based investing platform. No, this is not the kind of pie your grandmother would make, but instead this is a pie based investment portfolio.

Within M1 Finance, your portfolio is referred to as a pie. Your pie breaks down what positions or securities you would like to hold in your account as well as how much weight they carry in your portfolio. You can create your own custom pie in M1 Finance and choose your own investments or you can invest in an M1 Finance expert pie.

In this article, we talk more about fractional shares on M1 Finance.

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M1 Finance Pie Based Investing

M1 Finance also offers expert pies on the platform. These expert pies are created by M1 Finance and are offered to provide increased diversification as well as low cost alternatives to some of the other investment options on the market. These expert pies can also be a suitable choice for beginners who do not want to build an investment portfolio from scratch. These expert pies can make up your entire investment portfolio or just a portion of it.

M1 Finance creates these professionally built pies based on generally accepted investing principles as well as past performance data. They offer a variety of expert pies, each composing of 2 to 20 securities depending on the type you choose. Expert pies are designed by M1 Finance investment professionals as well as third party partners such as Cambria Investments. M1 Finance offers 9 different categories of expert pies.

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M1 Finance Expert Pies

Here are the categories of the M1 Finance expert pies…

  1. General Investing: Choose from risk levels ranging from ultra conservative to ultra aggressive.
  2. Plan For Retirement: Invest for your target retirement date. Your portfolio allocation will adjust over time to become more conservative as you approach retirement.
  3. Responsible Investing: Socially conscious investing. This investment category invests in companies that are concerned about financial obligations as well as social and environmental obligations.
  4. Income Earners: Contains dividend and interest paying securities.
  5. Hedge Fund Followers: Pies that track public funds such as Berkshire Hathaway and Icahn Enterprises.
  6. Industries & Sectors: Invest in one segment of the overall economy.
  7. Stocks & Bonds: Multiple options of diversified stock and bond exposure.
  8. Other Strategies: Other investment options like blue chip stocks, domestic growth, domestic value and more.
  9. Trinity Portfolios: Portfolios created by Cambria Investments. Learn more about Cambria Investments here.
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M1 Finance Expert Pies

M1 Finance has a quantitative model for choosing the specific ETFs within each expert pie. This model takes into account variables such as fees, assets under management, and tracking error of standard deviation. These variables are considered and result in low cost ETFs that track the underlying benchmark(s) better than others.

There are no fees associated with using M1 Finance or the expert pies. However, all ETFs have management fees associated with the fund. M1 Finance chooses ETFs with some of the lowest fees. They are also very transparent about the management fees charged by ETFs on their platform.

Click Here To Get Started With M1 Finance

How Does M1 Finance Make Any Money?

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the roboadvisor and algorithm based trading have taken the brokerage industry by storm. One of the most established examples being M1 Finance.

M1 Finance has an offer that on the surface might seem too good to be true. First of all, they offer commission free trading. Second of all, the minimum account balance is just $100. Is M1 Finance operating as a charity? Not quite.

First, M1 Borrow

M1 Finance makes money in a couple of different ways. The first way that M1 Finance makes money is by offering a feature known as M1 Borrow.

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M1 Borrow

M1 Borrow allows investors to take out a portfolio line of credit. Your investments in your M1 Finance account serve as the collateral. M1 Borrow allows you to borrow up to 35% of your M1 Finance account balance at an interest rate of 3.75% per year. Essentially, M1 Finance extends a loan to you and in return if you do not pay it back they can sell your investments to cover the loan. The risk on M1 Finance is relatively low, so this is easy money.

Second, lending shares to short sellers 

Short sellers are borrowing shares to bet against them. Short selling is a relatively complicated subject, and that is a topic for another article. However, M1 Finance is able to loan shares held by investors to short sellers and profit from doing this.

Third, uninvested cash in your account

You know that cash sitting in your investment account? Depending on what brokerage you are using, you may or may not be earning interest on it. Free investing platforms like M1 Finance do not offer interest on the cash in your account. Instead, they keep the interest earned on the cash balances.

On a cash balance of $10,000 this could be as little as $50 per year. However, when you consider that M1 Finance has millions of dollars in cash sitting in investment accounts these small bits of money add up.

Fourth, directing order flow 

Brokerage accounts like M1 Finance can receive commission or compensation for directing orders to different parties for execution. The brokerage receives a small payment for directing the order to different parties.

Between these methods, M1 Finance is able to make money and offer a brilliant investing platform completely free.

Click Here To Get Started With M1 Finance