If you follow me on social media (Facebook, Twitter, Pintrest), you may know that I’m joining a slew of other bloggers in a year-long investing challenge. Here’s how it works: We open a brokerage account wherever we choose, trade however we choose, and legally grow $1,000.
I get excited about this kind of thing. That’s the life of a money geek.
When I first thought about careers I thought being a trader would be absolutely kickass. Only when I started hearing about insider trading scandals, severe burnout and drug abuse (anyone see Wolf of Wall Street?), and the number of people who washed out of the business broken, did I begin to reconsider.
Then as I dug into the mountains of research to decide what strategies would be best for me and my money, I found that the odds aren’t in your favor. Trading, for most, is a fool’s errand.
But won’t this be fun?
So, let’s outline a few points before I begin telling you how I plan to play this little game:
1) The moves I’m going to make aren’t going to be responsible. I’m playing to win a short term contest in the stock market. If you don’t know much about finance, I hope you realize that the phrase
“short term contest in the stock market”
Here’s why: The stock market is a great place for long term money. Over a ten year period you nearly always have made money. However, over a single year, there are huge odds that you’ll lose money, even if you’re responsible.
I’m going to try and counteract some of these stats by planning good defensive moves, but trying to win over a single year is a bad idea if you’re buying stocks.
2) Diversification is your friend if you’re playing it safe, so I’m not going to diversify appropriately. The reason why we recommend Jemstep.com on our podcast is because they help investors practice sensible investing using a diversified approach. This isn’t to help you win with investing….it’s purely a move to ensure you don’t lose. Diversification is the enemy of a get-rich-quick scheme (which is exactly what I’m participating in with this contest).
3) Tax strategies be damned! Here’s what always confused traders I knew about taxes: they wouldn’t see the tax bill on their bottom line….therefore they’d think they were winning by far more than the actual bottom line. Why? Taxes are figured and then removed from whatever account you choose. Most people have no clue where the tax problem stems from. In this case, I’m just trying to increase the bottom line to win a contest, so I’m not going to be concerned with taxes.
Okay, got all that? This is a really dumb contest and you shouldn’t emulate what I’m doing. Okay? Great. That said…let’s jump into my strategy.
I know some of these bloggers. In an effort to win, some will pick index funds. While that’s precisely the direction I’d choose given a long-term horizon, I’m going to avoid them at all cost with this contest. Why? I need to pop a nice big return early to give me some bigger trading options down the road.
Here’s what I’m going to do:
Top down investing: I plan on taking what’s called a “top down” approach. I’m going to pick areas of the market that I think will be hot and then I’ll invest in likely companies within those sectors.
Limited diversification. I know I told you I wasn’t going to diversify. That said, I don’t want to get pummeled by picking a single stock. So initially I plan to buy three positions: one with $400 and two with $300 apiece. This won’t diversify me enough for good long term goals, but with a year, it’ll keep me lean enough that I’ll see spikes in the account.
Size matters. I don’t care what your husband/boyfriend tells you. Being huge sucks in this contest. To win this competition, I’m going to have to pick some fairly small companies. Big firms don’t move up and down on a regular basis as much as small ones.
Here’s another reason I’m going small: the market has been on a tear, and if things get ugly, often small firms can buoy against a storm. I’m really worried about the market (not fundamentally, but just the fact that we’re WAY ahead of the game), so I’m excited about buying small companies.
Alright! In the next piece I’ll tell you about opening my account and what I purchased.
Matt @ momanddadmoney
May the luckiest man win!
Agreed. With only one year, it’s a total roll of the dice.
Done by Forty
I like the strategy, Joe. Any chance you might just go all in on one company? Maybe buy on margin? I’d love to see the riskiest play possible.
Dude, you like a little hot pepper in your investing, don’t you? I’m only afraid that if I went all in on a single stock or used margin that I’d get so far behind I’d have to decide between more risk or packing it in altogether. Funny….I feel like I’m taking a risky approach, but all I’m thinking about is risk management……
John S @ Frugal Rules
I can so relate to the life of a money geek – my wife just gave me a goofy look when I said I was excited to be a part of it. That said, I like your strategy – in light of the contest of course. I’m going the boring and stodgy route of a solid index fund. Yes, counterintuitive to the contest, but what can I say – I know I can’t hang with ya Joe. 😉
I think what you know is that I’m running a fool’s errand and you’d rather hold on to your grand. 🙂
Hope you win =) 2013 would’ve been a great year to grow $1,000 in a hurry! =)
I know! But if we have that year again, John at Frugal Rules and his total market index are going to kick my butt….