Start Trading or Investing in 5 Steps
Updated: Jun 8, 2022
Taking the leap into trading or investing is an important one. The earlier we start the more time our capital has to enjoy the benefits of compounding. I was fortunate and got started at 16, I'm now 31 and am extremely grateful for starting when I did. Let's look at why and then how you can get started.
From 2007 to 2021 I had a 22.8% CAGR, the SP500 returned 10.67% over the same span. I started with around $3,500 so we'll use that for the example. Below is a graph of returns for SPY and my own CAGR (es) with three variants. Return 1 assumes no additional savings, Return 2 assumes an additional $10K of savings per year, Return 3 assumes an additional $19K of savings per year. The savings per year are averaged, with the expectation that early savings would be smaller ($3500-$5000) and as time passes our contributions grow ($20K-$50K). I selected these because I feel this amount of saving is possible for those committed to actually saving, starting to save in they early 20's. I believe people can save even more aggressively than these scenarios but wanted to offer an initial planning factor.
The outcome for all these scenarios is impressive considering a beginning amount of $3,500 (compounded annually). I think it's important to direct attention to the SP500 returns, because it's possible for ANYONE to create a buy and hold account in an index ETF like SPY or VTI. If you placed $3,500 in the SP500 and came back 14 years later doing absolutely nothing, it would be worth $14,470, nothing crazy but not bad for doing nothing. The true magic begins when we SAVE alongside investing or trading. My returns are obviously a bit different, my CAGR is just over 2x that of the SP500. I share this outcome because I think it's possible to outpace the market with effort but that may not be the right approach for everyone. This also doesn't include the effect of more active compounding interest. If we actively trade and start with $10K and two months into the year have $13K, our principal has grown and offers heighted return potential. All that aside, the name of the game for new traders OR investors is PRESERVING capital and not setting ourselves back.
Many (myself included) get excited and want to start earning fat stacks right away. Unfortunately, this typically leads to poor decisions and unfavorable risk to reward profiles.
How do we get started in 5 steps? This video outlines the process below in detail.
Save, shop for a broker, and open an account. We need to start with something (our principal) and need access to the markets (broker). While there are tons of choices for brokers, with commissions being so competitive now I think there's no reason to go cheap here. Find a ROBUST broker that will support you as a trader and offers capabilities you're interested in. You'll also need to decide what kind of account do you want to open. If you're investing, a cash account is common. If trading, a margin account will be useful (you'll also need to apply for options permissions). You can also setup a ROTH or Traditional IRA account (I trade my own).
Plan. If you're interested in investing, it's a bit easier than those who will be trading. Both however, should develop a trading plan. For investors, thinking about how you will allocate your portfolio, investing horizon, how often you want to rebalance, etc. For traders, the above applies in addition to what specific strategies you want to employ, how you'll analyze prospective trades, how you will track and analyze performance, how you will make adjustments to your plan etc. You can checkout this video for more detail on how to plan to trade.
Papertrade. I think this is a useful step for BOTH investors and traders, although traders should spend more time here. The primary goal is to become familiar with the platform you're trading on and your broker. What resources are available? How do you set things up? How do you actually enter or exit a position? What research can you conduct? Etc. For traders, this is where we should be practicing our strategies, assessing their performance, and making adjustments. It's important to papertrade as if it is the actual account you're actually going to be trading. We can also use additional papertrading accounts for research and testing but I prefer to keep them separate. You can learn more about papertrading here.
Fund the account and find resources. You'll need to connect your bank account to your brokerage account to transfer funds. This is also a great time to find resources to aid in your investing or trading journey. Things like newsletters (I share one weekly! You can signup here), reports, Twitter accounts to follow (like mine), and YouTube channels (I host a WEEKLY YouTube live session and monthly trading workshops) can be great resources for even passive investors to stay in touch with things.
Go Live. This is when you actually begin deploying your strategy. Be sure to have a process to assess your performance and make adjustments. This is an essential process for investors and traders alike.
Trading has absolutely changed my life for the better and I am truly passionate about it. I think there's huge potential for EVERYONE to benefit. If you want to maximize your potential, consider joining the Outlier Community! We have a group on Facebook (The Outlier Trading Dojo) to share ideas and connect with other traders. Whatever you choose to do, have a plan, mind your risk, and keep learning. Have any questions? Shoot me an email or comment here, let's get it answered.
Be an Outlier!