Last week’s retail investors vs hedge fund managers’ face-off were so massive that virtually every news outlet was covering it. Even if you didn’t watch the news, your Facebook newsfeed would have covered it for you. In a span less than a week, almost everyone on Facebook became stock market savvy and interested in investing. Not a single time in history have people become more interested; some for a chance to win a big-ticket lottery to quick wealth, while others were motivated by a more visceral despise for the established market makers and hedge fund managers who they saw as directly responsible for the market crash of 08 and the ensuing recession which put many American families in difficulties and small businesses out of operation. The war continues as you read this article now (1/31/2021), and I suspect many wants in on the fight coming Monday – whether for one of the reasons, or both. However, before you decide to jump into this foray, you should know the risks involved.
First, what is happening with the hedge fund war is not “investing”, it is trading. Trading is an extremely risky operation that requires great caution and discipline and the reading and interpretations of price actions and market sentiment; one moment you can make $10,000 and the next you can lose it all and be under -$5,000. The difference between trading and investing can be summarized like this: “Trading is gambling with your hopes and dreams, whereas investing is saving for your hopes and dreams. “
Investopedia defines investing as the act of allocating resources, usually money, with the expectation of generating an income or profit. Ally.com differentiates investing and trading as follows: “trading focuses on short-term buying and selling while investing involves buying and holding securities for an extended period of time.”
In short, investing is a passive, set and forget strategy. Once you have done your research into what company, services, and demands will grow, you buy shares of it and allow time and compounding interests to do its work. And trading, well, it’s just pure gambling. The best advice I can give from personal experience is – take your profit and move on!
In a high volatility stock, you can lose everything in just a split second! If you were in on the GME, and AMC battle, make sure you take out your profits. In fact, in any short-term stock trading, it is a good practice, when you are ahead of the market, to take out a specific amount. The higher the volatility, the higher percent you should take out. I would recommend taking 100% of your original cost while letting the rest of the profit continue riding the wave if there is still momentum in the direction of your trade.
So now that we are all in the stock market and understand the difference between trading and investing, what are the next steps to take so we can incorporate this new knowledge make it a consistent part of our future plans?
In his book, 99 Minute Millionaire, Scott Alan Turner breakdown the investment vehicles into four different types:
- Company-based plans (401(k), 403(b), 457, Thrift Savings Plan)
- Individual Retirement Account (Traditional IRA or Roth IRA)
- College Savings plans (529 College Savings Plan)
- Regulars Investment Account (Brokerage Account – e.g. Robinhood, Webull, Fidelity, etc.)
While not everyone has company-based plans, the other three vehicles or carts as Turner calls them, are available to a majority of us. IRAs in my opinion remain the best way to save money and avoid taxes. There is a max annual contribution limit depending on your tax bracket, most Americans will fall within the $6,000 contribution limit. There is also no limit to the number of IRA account you can have, as long as the combined contribution is not above your limit. You can easily open an IRA account on Webull or have an existing Roth transferred over.
College Savings plans are an excellent way for parents to put away money for their children. Unlike IRA there is no annual contribution limit, you can put away as little as you want (don’t worry, as long as you put something in, I’ll talk about the effects of compound interest in a future article) or as much as you can afford. Some 529 College Savings plan even allows extended family members (aunts, uncles, grandparents) and friends to make a gift contribution to the plan. Here are some key benefits you should take into account opening a 529 plan according to Charles Schwab:
- Tax advantages: Not only do 529 plans provide federal tax-free growth and tax-free withdrawals for qualified expenses, but many states offer residents a full or partial tax credit or deduction for contributions to their state’s plan, and some states allow you to deduct contributions to any plan (see “What you can do next,” below). Such funds can now be used for kindergarten through 12th-grade tuition at private schools—up to $10,000 per child per year—as a result of the 2017 Tax Cuts and Jobs Act. That said, not all states permit 529 plan spending on K–12 tuition expenses, so be sure to check your plan’s rules, lest you be subject to state income tax plus penalties.
- Minimal impact on financial aid eligibility: Unlike funds in, say, a custodial brokerage account, only 5.64% of the assets in a parent-owned 529 are factored in to the Free Application for Federal Student Aid (FAFSA®), which helps determine eligibility for grants, work-study programs and loans.
- Flexibility: Once the beneficiary has earned an undergraduate degree, any remaining funds can be used at any point in the future toward graduate, trade, or vocational education. You can also reassign a 529 to any direct relative, meaning not just offspring but also nephews, nieces, cousins, aunts, and uncles—even yourself.
The third vehicle widely available to the rest of us, the Regular Investment account, is the one most of us are familiar with already. I recommend Fidelity which has comprehensive investment tools that can help you plan for retirement as well as trade regular stocks and ETFs, commission-free. One of the main benefits of a well-established investment company like Fidelity is access to index funds that track the entire market, for free. For smaller commission-free brokerage, I use Webull. Webull is ideal for investing and the occasional trading foray – their charts and indicators are without comparison in my opinion!
Remember that responsible financial planning helps saves for our future and dreams, and emotionally-driven trading gambles away those hopes and dreams.
If even after reading this, you still want to get into trading as well, you can head over to my Facebook group at https://www.facebook.com/groups/959312344543631 .
Nothing said here or on the page should be taken as investment or trading advice. I hope you have found this article helpful and I wish you luck on your journey to becoming a successful investor!
Invest responsibly, your future, or your kids future may depend on it!
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