Advice to those just getting started

Just thought I would provide a topic for discussion on issues faced when first beginning to build your portfolio.

1. Commissions. With a small portfolio, commissions are a huge percentage of your trade value. You must find ways to minimize the cost. Trade only one or two larger trades using up the bul of your portfolio (not fun). Seek out low cost commissions (often require certain number of trades per year or high balance). I remember one of my first trades, I was so proud to sell and make 30% on my investment only to find out that after crunching the numbers and including the commissions, I had netted only $3 (and had to pay tax on that as well). The preferred solution to commissions is to just add more money to your portfolio to the point where the commission is not a significant % of the value of your trades (not easy to do if the money isnt there to add).

2. Diversification and position limits. Completely out the window at this point in the game, but it is an important point to remember that your picks will sometimes be wrong. It is easy to get discouraged, when your entire portfolio disappears because, by necessity you have it all invested in only one or two stocks. As you get more money invested and can spread it around a bit to diversify your risks, things do get better. Also remember that it is much easier to put your entire portfolio of $1,000 into a highly volatile stock and double your money than it is to do the same with a $50,000 portfolio. The amount of money at risk affects your behaviour. Over time your performance will average out, but in the short term you can have a large deviation + or -.

3. Making ENOUGH profit. With the size of your investments likely to be quite small, you will find that you will often need to make a huge % profit just to cover the commissions. If you have only invested $500 into a stock, than it will have to climb 10% or more just to break even. Then another 10% gain after that only to end up with profit of $50 (which you then spend on a celebratory dinner). You may feel hungry for more profit and this is a good thing, as it will encourage you to add more money to your portfolio, but this will also often lead to you taking counterproductive and outsized risks. Two ways to look at this: A. This is your time to practice until you have real money at stake, so go wild and learn your lessons the hard way. B. Convert your gains into annual % return. This will remove the size of the gain as a factor and focus on consistently achieving a reasonable %.

4. Picking winners. This is not easy. I like to search for large cap stocks that have been unreasonably beaten up as a starting point, Fred seems to follow volatility and news. You will need to find a source of ideas (this site, other people, news, etc....) that will provide you with stocks to research. Google: stock screener and you will be able to filter all the stocks based on certain criteria you select which you think indicate an undervalued or high potential stock. Focus your time on developing a strategy to find winning stocks.

5. Communicate. Dont be afraid. Having a discussion group to provide feedback about failures is a hugely valuable experience. Losing money in stocks is embarassing, and tendency is for people to lie to themselves and others about their choices (in my case develop new measures of profit so that I can pretend like I made money even when I dont). Learn to overcome your fear and discuss publicly about your failure. You will find most people have done the same thing and will help reveal the lesson ou need to learn from that failure. If you are not making mistakes, you are either perfect or lucky (my money is on lucky).

6. Taxes. Not to be ignored. Dividends are taxed more favourably than capital gains. Capital Gains are taxed more favourably than interest. Learn the rates for your province and personal tax bracket. Often, you will find that you can make more money by reducing an expense (such as mortgage interest) which will have no tax consequences than investing and earning taxable income, since you will have to earn a much higher return from the investments to compensate for the taxes. A capital gain will pay double the tax inside an RRSP as a capital gain on the same stock outside of an RRSP (although partially compensated with other tax advantages of the RRSP). Taxes are an integral part of your return, dont assume they will take care of themselves.

7. Giving up. If you dont make money, if you dont feel obsessed by trading, if you look at the whole thing as a lot of work and no reward, if you are getting depressed.... there is always indexing. Picking individual stocks is not for everyone. However, indexing can provide the same opportunity to be a DIY investor while removing a lot of the risk (and reward). In fact, as my own portfolio growths, I am coming to believe more and more that I need to take some portion of it into a passive indexing strategy. You can look up couch potato investing and find some useful strategies for passive ETF index investing. The idea is to diversify as much as possible while removing any redundant (correlated) funds, and reducing fees in order to match as closely as possible to the entire market average return under the assumption that the market always goes up in the long term and that all the hard work of most DIY investors usually does not result in much better performance than the market average (and often much worse). You may come back to stock picking in time once your portfolio size has grown.

Whatever you do, I hope you will learn that you can do better than mutual funds. Most of them are index funds in disguise but with much higher fees. There are very few that can outperform the market average, and those that can usually have exorbitant fees.

Please post any additional issues you are concerned with and we will do our best to give some advice...

First off just wanted to say thanks. Great info.

Just wanted to add a little something about the commmissions talk. I am trading through TD Waterhouse but I am assuming majority of the discount brokerages have similar commission schedules. As max stated if you make a certain number of trades you can get a cheaper rate.

The starting out rates are a MINIMUM of $29 per trade so you have to make at least $60 just to cover your costs. If you make at least 30 trades per quarter it drops to a flat rate of $10 per trade. This savings is pretty huge so even if you can't find 30 trades you want to make in a quarter it is worth finding a stock that fluctuates somewhat regularly even in small amound and just buy and sell to break even. Make $60 and get out. The trades will add up and you can get to the lower commissions. Once you are at the lower commissions you now only have to make $20 and get a few times to help keep your rates low.

This is my plan. I will let you know if I actually make it work or just continuously lose small amounts of money.

There are other options. Shop around and see which are the best deals. Watch for account maintenance fees too.

I use CIBC with their "Edge Advantage" deal that seems like it would be better for you than the strategy you are proposing. It is $395 for 50 trades over 1 year ($7.90 each), and then each additional trade is $6.95 each after 50. The catch is that you need to prepay the $395 at the beginning of the year.

However, if you are going to make $30 trades per quarter at $10 each ($1200 per year), I think you will find CIBC to be the better deal. With my averaging down strategy, I can really churn through the first 50 trades. However, with a small portfolio, averaging down is not so easy, and you will find it very hard to make 30 winning trades each quarter that will beat the commissions. I would recommend an order size of 100x the amount of the commission (or having commission as 1% of trade value). Therefore, even with a $10 commission, each trade should still be about $1,000. You should consider this when selecting your account, but consider also that your portfolio size will change over time and you will eventually find a need for higher volume of trades. You should find a balance between your current needs and what you expect to need in the future. Switching accounts without liquidating the portfolio is expensive, and liquidating the portfolio means lots of unnecessary commissions.

You may want to look for something with a low flat rate per trade like Questtrade (which I think is currently the cheapest). I have never used it and I read that there are certain restrictions and that their platform is not the easiest to use, but read the reviews yourself and see what you think. I am sure there are others options out there like this as well. Most sites will provide you with a demo of the trading software so you can get a feel for it. Go explore these and see which one you like for the money. Keep in mind that there is some sense of security being with one of the big 5 banks. It may be a little difficult to get customer service with an independent broker.

I think if you can get a flat rate of $10-15 without the mandatory # of trades, you are doing well. $25-29 is pretty standard among the big banks. One thing I like about my trade package is the 50 trades (and all trades above 50) can be used for US trades, limit orders, etc... all of which would normally cost more under a standard fee structure. In case you haven't read it elsewhere, you should ALWAYS use limit orders instead of market orders. Set up a separate thread on placing orders if you need help with the basic explanations and strategies for different order types (I might go ahead and post it myself anyway).

Does anyone out there have a deal better than my $6.95 per trade (after the first 50)?

To start I will mention I use Royal Bank and I like it very much.

I remember having the same issue with commissions as ILO. Even worse than the $29 trades is after you go above 1000 shares, they start charging you 1.5% of your transaction, so be very careful. Think about how bad that really is! I remember paying $250 to buy and $250 to sell... and that makes trading for the little guy nearly impossible, but I accepted it because I put in enough to make sure I would get some profit. I wouldn't ever do it again though. I have also tried what ILO is suggesting... trading as much as possible to try and cover comissions. I even did it at slight losses and made some nice gains too, but I never, not once, ever made it to 30 trades in one quarter. I made it to 22 on my most valiant attempt.

My final solution was to keep borrowing (because the interest rates were so low) until I met the 100K threashold in my trading accounts. There were two points to justify this:
1) I actually started by transferring the cash into my account and leaving it there with no intention to spend it.
2) I could make more with the money if it was invested than I would spend on interest by borrowing it.
It's a bit of a risk no doubt, but I learned quite a few valuable lessons. Also, I couldn't resist spending the money when a great deal came up, and I ended up better off anyways. The thing was, that you would have had to work very hard to lose during 2009.... I was lucky with timing.

Once you reach the 100K mark, call the bank and notify them. They will change your status, and don't worry about the warnings they give you about going under the 100K amount. Once you've reached it, they give you that status for quite some time before they cut you off. For me it was 7 months. Also, I learned that after you have reached that status, you can go as low as 80K before they automatically cut you off.

So I was able to take out cash to pay off my loan as long as I stayed above 80K (which is still a hell of a lot for us, but much better than 100K).

In the end what I decided to do was sell all my RSP's and pension plan investments and transfer them to my investing accounts. (This may cost a few $, and take a while, and you may need to open some new accounts i.e. RSP, LIRA, etc, but in the end it gave me a pile extra cash to work with and pushed me well over the 100K mark. Plus when carefully planned, you can significantly outperform the market on your own. (I did 10% in one month)

Keep the questions comming.

Yikes Fred, somehow i feel a little out of my league! Good job though!

OK, maybe slow and steady doesn't win the race. A deeper discussion of leveraging aka mo money, mo problems is a well deserved topic for another post.

Fred, what were your commissions with 100k + in the portfolio? Somewhere around $7 or $8 as well wasnt it? Are there still a minimum # of trades you need to make? I am still trying to champion my CIBC trade package. The trades have no restrictions on # of shares either (so you wont get caught with a $200 commission). If you have a better deal, all things considered, I will switch.

As a slight aside, that is an excellent point Fred made that we are in an unusual time, and a significant part of the results over the past few years is lucky macro economic timing. If you as paranoid and conservative as I am, you might expect a significant pull back in the markets over the next year or so. To those just entering the market, you have equal probability of being a victim of this timing as opposed to being a beneficiary of it. Don't get discouraged:

1) You are playing with a relatively smal amount now. In the event of a sustained market crash, you will over the course of your lifetime invest the bulk of your money into a steadily rising market beginning at the bottom. This is great.

2) Volatility creates opportunity. Investing is very dull without the peaks and crashes. Most successful strategies to beat the market average depend on this volatility. Volatility does not equal risk. Risk is probability of LOSS, volatility measures severity of CHANGE (+ or -).