Where to start when it comes to trading/investing?

[nomore4s]

This is a commonly asked question we see on the forums from newbies and I thought I would try to answer it in a bit more depth then we normally see but it will take me a few posts and quite a bit of rambling so you will need to be patient

The first thing that needs to be decided is how much time and energy is to be devoted to learning, devising and implementing strategies to start extracting returns from the market. This will then help determine what type of time-frame and strategies to devote time too.

The next stage is to set some goals, what do you want to achieve from investing/trading? And do the goals then match up with the amount of time you are willing to put into your trading. I'll give a bit of a hint here - probably the most important goal in trading is to control your risk and minimize your losses.

Alright we have covered the easy bits, this is where it now becomes slightly more difficult for beginners - building a plan to achieve your trading goals that also fits in with the time you are willing to commit to trading. Building a plan for a beginner can be very difficult due to the fact they don't know what they really need to know to build a good profitable trading plan. So that means the first goal and first step in a plan should be based around education, which is why they probably have ended up on this forum in the first place.

As the more experienced know it can take quite a few hours of study and then plenty of trading mistakes to finally formulate a understanding of how to be profitable. This is why I feel too many beginners (and some of us more experienced) get lost in the short term aspects of trading and should actually start with a long term investment strategy first as this gives time to study and learn other strategies while also giving a feel of how the market works. I know I wish I had, I would be probably 5+ years in front of where I am at now.

This is all I have time for atm and I know it has really gone nowhere so far but I will look to do a post on the power of long term investing in the markets using dividends to create an income stream highlighting why I think this is a good place to start. I will also look at giving a run down on my various portfolios that I run and the goals and ideas behind them.

 

[youngone]

This is all I have time for atm and I know it has really gone nowhere so far but I will look to do a post on the power of long term investing in the markets using dividends to create an income stream highlighting why I think this is a good place to start. I will also look at giving a run down on my various portfolios that I run and the goals and ideas behind them.

Thanks for the run down for us newbies. Looking forward to the next lesson, and perhaps, if you have time explain to us on medium to long term trading plan. ($1000-$5000)

 

[nomore4s]

Before we go any further I will outline my various portfolios and the ideas and goals behind them. There won't be too many specifics as what I'm trying to do is give beginners an idea on how to structure an idea/strategy so they can then go out and do the research on how best to implement their plan to make it profitable.

I run four different portfolios all with different objectives and time frames. I will quickly outline the portfolios here and then go into further details in later posts.

1. Income Portfolio
- Build income stream from dividends
- My version of a buy and hold strategy (there is exit criteria although the goal is to never have to sell)
- This portfolio is about accumulation, a great deal of patience and long term vision is required.
- This is my retirement fund
- My money only - no leverage used

2. Long term growth
- Mechanical system trading - signals generated daily but are filtered at my discretion based on a checklist as I get too many signals to take.
- Aim is to capture long term trends (obviously works best in a bullmarket)
- Leverage is used, once a certain open equity level is reached as this lets me continue to grow the portfolio when conditions suit it and I've run out of capital.

3. Swing trading
- Discretionary pattern trading (charts)
- Higher turn over
- Leverage used on occasion
- I run a number of different strategies within this portfolio depending on market conditions and cycles.

4. Futures day trading
- Discretionary trading of indexes
- Can be the most profitable portfolio but is also the most stressful and time consuming portfolio. Also requires the most skill and discipline to run successfully day in and day out.
- Requires a fair chunk of capital to help migrate the risks due to the high leverage used.

I personally believe that beginners should stay clear of strategies like portfolios 3 & 4 until they have reached a solid understanding of - the markets and how they work, how to read charts, position sizing, risk management of not just trades but also the whole portfolio, how to test if strategies are actually profitable when traded, and lastly how to actually trade it profitably. This is where the 10,000 hour rule applys.

We all hear how only 3-5% of traders are actually profitable, imo it is because people jump into to trading too soon and then get burnt and only that 3-5% manage to survive or stick with it long enough to become profitable. Remember the markets will reward the patient and punish the impatient.

This is why I believe most people should start with longer term investing in the stock-market especially when they have limited knowledge, as they can begin to set up a decent long term strategy while still educating themselves on the various ins & outs of the market without exposing themselves to excessive risks due to limited understanding of the markets. But this does not mean they should just jump in without also doing the research needed to correctly implement a longer term strategy.

Capital constraints are also another issue and I realise that most people are not going to have the capital to be able to run 3 or 4 different portfolios like the above. Now I'm sure a few of the more experienced are going to disagree with me here but if a beginner has limited capital say $10,000, it is my view that is not enough money for a inexperienced trader to start trading short term strategies like portfolios 3 & 4 as brokerage fees and tax on any profits do take a toll on such small capital and then throw in one or two decent hits and it makes it very hard to recover.

 

[skc]

Before we go any further I will outline my various portfolios and the ideas and goals behind them.

Nice thread, 123567890. Do you mind telling the audience...

What percent of your total capital do you allocate to each portfolio?
What range of returns do you target / achieve for each portfolio?

Thanks

 

[nomore4s]

Nice thread, 123567890. Do you mind telling the audience...

What percent of your total capital do you allocate to each portfolio?
What range of returns do you target / achieve for each portfolio?

Thanks

lol @ 123567890

I suppose I can.

Portfolio 1.
This is actually separate to my trading funds altogether and I allocated a set amount to start it off and now add 10% off my total earnings each year to it as well as 10% of my profit from my other portfolios and all dividends are re-invested. I also keep a war chest in reserve for any market crashes.
I also don't have any return targets for this portfolio except to provide a passive income for me and my family 20 years down the track.

Portfolio 2.
25% of trading funds.
Aim here is to achieve 10-15% return pa but in good market conditions with leverage I can achieve very very strong results. Been running this portfolio for nearly 2 years now and the returns were very spectacular early due to market conditions but has been a bit more steady lately.

Portfolio 3.
25% of trading funds.
Aim here is 15%-25% return pa depending on market conditions. Have been returning around 20-25% pa for the last 3-4 years.

Portfolio 4.
50% of trading funds.
With this style of trading can return 5-10% per month. But I have had days that have returned 10%+, but have also had some very bad days early on while learning. As stated before the returns can be very good with this style of trading but the pay off is it requires a great amount of skill and time and can cause quite a bit of stress. I have posted a weeks returns on another thread somewhere when I was trading oil futures.

I will add I don't re-balance portfolios, what they make stays in that portfolio and my position sizing then adjusts accordingly - except portfolio 4 - all profits after tax go into either my income portfolio, homeloans, or savings accounts.

 

[NewOrder]

Thanks for the taking the time for us newbies Is it appropriate if I outline my plan and bounce some questions?

 

[nomore4s]

Thanks for the taking the time for us newbies Is it appropriate if I outline my plan and bounce some questions?

Go for it

 

[skc]

lol @ 123567890

I suppose I can.

Thanks... very similar to what I do actually. Except my Portfolio 1 is made up of managed funds (a split of index fund and smaller company fund) just because I am lazy, and my portfolio 4 is the $300 account I left open when I tried out some new CFD mob. Starting balance $500 so down 40% since the start, showing what skill I have when it comes to trading futures.

 

[NewOrder]

Thanks

OK this is my plan as it stands now but it is a work in progress. I have done a fair bit of self education, lots more to go. My Trading Plan is 80% in place. I then plan to paper trade for some months.

Portfolio 1)
Long term dividend reinvestment.
Hold approx 15 stocks across at least 5 Sectors.

Portfolio 2)
Short to medium term tading based on TA
Strict risk management using 1% loss as max equity I will risk to start with.

Portfolio 1) is aimed as a long term passive income portfolio.
Portfolio 2) is to generate some yearly income, anything over and above my fairy frugal lifestyle costs (except for big education expenses for the kids) will go back into either Portfolio 1 or 2.

The starting equity is mine, no leveraging. I will start with a fairly conservative outlook and only trade within Aust top 300 shares. After at least 12 months and some building of confidence I will then look at stepping outside this zone.

Questions
I have a large starting base but am low risk for now. I was thinking that I would hold all funds in a cash account and slowly begin Portfolio 1) first. As I do not need to accumulate the funds I was going to use TA as a means of timing into the shares. I understand that many people will buy in parcels as they accumulate the funds so dollar cost average but I have the funds there so don't want to throw the whole lot in at once therefore not giving me the same advantage of dollar cost averaging.
WDYT?

With Postfolio 2) again it will be a fair sum of money so I am not sure that jumping in cold will be all that smart. My thinking is to start trading with only part of the money, leave the rest in the cash account and then move it into Portfolio 2) as I get the experience.
WDYT?


TIA

 

[nomore4s]

NewOrder,

You are certainly going about it in the right way.

Will post some of my thoughts.

Portfolio 1.
You need to be very specific as to what you want to achieve from this portfolio.
Is it purely passive income from dividends?
Or is it a mixture of capital growth and income?
What you decide will have a big impact on the type of shares you pick and the criteria you use to both buy and sell them.
The set of criteria (for both buys & sells) you use will need to be very strict and clear, it doesn't have to be complicated just clear and understandable to you.

https://www.aussiestockforums.com/forums/showthread.php?t=22425

The above thread highlights what happens when you have no clear direction, goals or understanding of what you are aiming to achieve, you end up going nowhere and achieving nothing - except wasting 5 years.
They wasted 5 years going nowhere and have got lucky with 1 stock and are now jumping at the next big thing with still no clear systems in place and no idea what to do with the rest of the portfolio.

I have a large starting base but am low risk for now. I was thinking that I would hold all funds in a cash account and slowly begin Portfolio 1) first. As I do not need to accumulate the funds I was going to use TA as a means of timing into the shares. I understand that many people will buy in parcels as they accumulate the funds so dollar cost average but I have the funds there so don't want to throw the whole lot in at once therefore not giving me the same advantage of dollar cost averaging.WDYT?

I agree with this although I would be spreading my entries not so much to dollar cost average but to spread your risk. With this sort of portfolio the first couple of years will be the hardest due to the slow returns to start with. I will post up some info highlighting how powerful it can be in the long term.

With Postfolio 2) again it will be a fair sum of money so I am not sure that jumping in cold will be all that smart. My thinking is to start trading with only part of the money, leave the rest in the cash account and then move it into Portfolio 2) as I get the experience.WDYT?

Take your time with this portfolio and do heaps of paper-trading of various methods, learn about things like fixed fractional position sizing and portfolio heat as this will control the risks.

 

[kingcarmleo]

Plenty of books to read for starters :

 

[NewOrder]

Thanks nomore4s

Portfolio 1.
You need to be very specific as to what you want to achieve from this portfolio.
Is it purely passive income from dividends?
Or is it a mixture of capital growth and income?
What you decide will have a big impact on the type of shares you pick and the criteria you use to both buy and sell them.
The set of criteria (for both buys & sells) you use will need to be very strict and clear, it doesn't have to be complicated just clear and understandable to you.

Yes I ideally do want capital growth as well as dividend income. OK you have highlighted a massive problem with being a naive newbie as I had not written a strategy about this in my trading plan.
I will have set FA criteria for the stocks I buy but have not put in my trading plan what to do about stocks that do not show capital growth or indeed what level of growth I am seeking.

I agree with this although I would be spreading my entries not so much to dollar cost average but to spread your risk.

is diversifying across stocks and sectors not enough? Do you mean here to spread entry for one particular share across a longer time frame or to generally spread buying stocks for Portfolio 1) over time?

I will post up some info highlighting how powerful it can be in the long term.

is this going to be from your own experience? I am keen to see the info.

Take your time with this portfolio and do heaps of paper-trading of various methods, learn about things like fixed fractional position sizing and portfolio heat as this will control the risks.

Thank you, yes I plan on paper trading for a while, I really don't want to give away my money, I want to grow it

I did start to read the thread you linked to but it did my head in, it just isn't how my brain works.

Again thanks for taking the time. I am not looking for specific trading info or tips, I very much want to be in control of my own decisions and outcomes, I do however appreciate the time you have put into discussing this

Cheers

 

[Julia]

Questions
As I do not need to accumulate the funds I was going to use TA as a means of timing into the shares. I understand that many people will buy in parcels as they accumulate the funds so dollar cost average but I have the funds there so don't want to throw the whole lot in at once therefore not giving me the same advantage of dollar cost averaging.

Why do you think there is an advantage to dollar cost averaging?

 

[burglar]

... is diversifying across stocks and sectors not enough? Do you mean here to spread entry for one particular share across a longer time frame or to generally spread buying stocks for Portfolio 1) over time? ...
Cheers

I would be guessing if I said you spread your entries over time so that you can see the profit coming on your first entries (if you picked good'uns) before going on?!

It is what I did ... and never did find out if it "wise" or just plain "feels right".

Hi nomore4s,

Congratulations, fine thread.

You have my attention!

 

[nomore4s]

Before I reply in detail to NewOrder, I will post up a spreadsheet that shows the power of a quality long-term income investment portfolio.

Now before I get any of the more anal posters pick it to pieces - this is purely an example using only 1 stock which of course will skew results a little but I only want to highlight the power of compounding using dividends and I would obviously not recommend setting this type of portfolio up with only one stock. And there may be some mistakes in it but I have tried to get it as accurate as possible.

I have picked CBA but nearly any of the big 4 banks will have similar returns. The big 4 banks are about 50% of my income portfolio due to the consistent increases in d/e's, but any stock that regularly increases d/e's will have similar results.

For this exercise the original investment is $5000 with a further $5000 invested each year and I have used $30 as the brokerage fee just to make it easier but this has little effect on the overall results. I have also picked the 1st trading day in July each year as the purchase date of each parcel, so i have not tried to pick the best or even a good entry every year, I just left this to luck.

There is a number of different year starts to highlight even if started only 5 years ago you would be well on your way with this strategy.
-15 years
-10 years
-5 years
-15 years with all dividends re-invested along with the $5000 just to further highlight the compounding effects but ideally this is how you would run this type of portfolio. Re-investing all dividends and adding in some of your own money each year if possible.

I have also included open equity using the closing price from Friday but with this portfolio that is purely a bonus and remember all dividends in this example are fully franked.

 

[burglar]

... I did start to read the thread you linked to but it did my head in ...

The thread in question is one of the weirdest here.
The Original Poster (OP) started with mention of Conspiracy Theorists, New World Order (NWO) and Chemtrails (being something mysterious which disappears when Obama is in town and reappears when He departs!)

IMO he did this to add interest and gain attention to his real problem.

On a whim, he'd put some capital towards a silver mining company and made a very fast return. But now, what to do with with the ill-planned portfolio which has disappointed for the previous 5 years.

Hope this helps!

 

[NewOrder]

Why do you think there is an advantage to dollar cost averaging?

Honestly? I am really not sure but what I am trying to get my head around is "should I put a large sum of money into a blue chip, dividend reinvestment type of portfolio, all in one hit or should it be in stages?"

nomore4s, that is a great excel chart, very informative and useful.

burglar, cheers for the explaination of the other thread m

I hope other newbies jump in here with questions.

 

[NewOrder]

OK another question, and yes I will get full tax advice at the appropriate time....

where do you pay the tax from? Do you take it out of your portfolios? If so would this need to be reflected in your excel chart nomore4s?

 

[nomore4s]

OK another question, and yes I will get full tax advice at the appropriate time....

where do you pay the tax from? Do you take it out of your portfolios? If so would this need to be reflected in your excel chart nomore4s?

There is no tax reflected in the spreadsheet because nothing has been sold which means there is no tax payable on the capital gain yet and the dividends are fully franked, which essentially means the company has already paid tax (normally at 30%) on them so the tax on the dividends is minimal for most individuals but it is probably best to do a google search on fully franked dividends and see how it might affect you. This is another advantage of this sort of investing.

As for my other portfolios I just put aside 50% of the profits and then pay tax out of that when required.

There are a few other things from your earlier posts I will address as I get time.

 

[nomore4s]

I did start to read the thread you linked to but it did my head in, it just isn't how my brain works.

The thread in question is one of the weirdest here.
The Original Poster (OP) started with mention of Conspiracy Theorists, New World Order (NWO) and Chemtrails (being something mysterious which disappears when Obama is in town and reappears when He departs!)

IMO he did this to add interest and gain attention to his real problem.

On a whim, he'd put some capital towards a silver mining company and made a very fast return. But now, what to do with with the ill-planned portfolio which has disappointed for the previous 5 years.

Hope this helps!

Sorry, I should have just posted the 2 posts from the OP to highlight what I was saying, most of that thread is off topic.

Burglar has pretty much nailed it. The OP invested $50k into the market with no plan or strategy and as a consequence has achieved very little in 5 years. He/she has then had a punt on a penny stock and got lucky but still has no idea on where to go or what to do with his/her investing/trading.

All the other BS is purely to OP's way of justifying the punt on the penny stock.

Below are the relevant posts.

This is my first post here - I hope it goes well - wish me luck.

I'm a newbie to this forum, but not to the share market.

I first got into the share market around 2006 I started with a comsec account with $50K in it to play with. I made quite a lot of money 2006 - 2008 and then it all went pear shaped. I've been out of action pretty much since Babcock and Brown collapsed.

Ok, so now it's 2011 and I'm back where I started in 2006 - the shares I kept (mainly blue chip, but heavy on resource stocks) along with the profits I reaped are back to just above $50K again - I'm not a complete tool.

I've got a full time job - and I've got plenty of time to spend studying the next big thing.

Anyway, this conspiracy theorist that I communicate with sometimes sent me a link a couple of weeks back that got me back in the game.

http://www.stansberryresearch.com/pro/1103PSIEOAVD/LPSIM3CH/PR

To paraphrase - the U.S. is f'cked and the only way out is if you buy precious metals - preferably silver bullion and lock yourself in a cave while the whole scenario takes place.

I listened to the whole freak'n thing (goes for two hours or something) with a really bad hangover. As a result the following Monday - I googled "Silver Miners listed on ASX", I had a lazy $5K that I ended up investing (gambling) in a silver miner called AYL - since that day sometime last week the stock has gone absolutely gangbusters.

I've made more money in 7 days than I've made in three freaking years holding crap like WOW, OZL, BHP, RIO, ROC AGL, IAG.

I'm not really sure where I'm headed with this and I guess the subject doesn't really describe the content of my post.

But I'm keen to learn some tips and tricks that will make me much more successful at this caper than I have been to date.

Spot on KurwaJegoMac

I'm well aware of the risk. With the blue chips I've still got you just lose your money slower - OZL, WOW, RIO, IAG are depressing examples of that - it's a slow death.

Cause I've held them for so long, I'm a bit stuck with what to do with them now.

In the past I've held stocks like Centro and Babcock and Brown that went down in flames.

Luckilly, some of the others did come back from the dead - AGK, BHP and NCM

I'll always keep a diverse portfolio, but I'm now looking to use 10% to 20% of my portfolio on some of these spunky small cap miners

Centro (CNP) and Babcock and Brown (BNB) went down in flames but the writing was on the wall for a long time with both stocks, just search for the threads and have a scan through them. This also highlights the poor(or lack of) planning and strategies used.