The rich get rich by buying appreciating assets like stocks, bonds, real estate, and fine art. The people who don’t get rich spend their money on depreciating assets like cars they can’t comfortably afford, and clothes that are never worn more than a few times a year. It takes discipline doing research on investable assets, which is probably one of the reasons why many people don’t even bother.
One of the biggest push backs I hear from readers who want to get rich, but don’t have enough disposable income to invest, is that investing costs too much and is too complicated. This post eliminates one more excuse people have for not building additional wealth.
It’s been a while since I’ve had to carefully watch my cash position, but since I spent a lot of money buying a fixer last year, cash flow is tight. I have a goal of rebuilding my liquid cash hoard to $100,000 in 2015, while also paying off roughly $85,000 in rental mortgage debt. It won’t be easy because I don’t want to cheat by selling assets to pay off debt.
Despite my debt elimination and savings goals, I want to continue investing in stocks and bonds when I see opportunity. With the recent volatility in the market, I see A TON of opportunity right now. Oil and energy stocks have gotten crushed, but aren’t going to zero. Market darlings such as Tesla, Pandora, GoPro, Yelp, and Lending Club have all taken a beating, and I love all their products and services. Interest rates have collapsed, providing a tailwind for a couple industries. I want to invest!
The only problem is, I’ve only got about $10,000 I can spare in this market volatility vs. a normal investment of $50,000 if I want to reach my savings and debt pay down goals.
HOW TO CHEAPLY INVEST IN A PORTFOLIO OF STOCKS
Common pain point: How do I build a portfolio of stocks at a low price if I don’t have a lot of money to invest?
Despite commission rates coming down, it still costs $7.95 to buy or sell a stock online. If you’ve only got $1,000 to invest, buying a basket of 20 stocks will cost you 20 X $7.95 = $159. Paying $159 in commissions for a $1,000 portfolio is a whopping 15.9% fee! Even if you had a more chunky $10,000 to invest, $159/$10,000 is still a 1.59% commission. We all know that commissions and fees puts a drag on returns.
Given the high cost of investing, the following is what happens:
1) Don’t bother investing. People who want to invest in a diversified portfolio of stocks, but who don’t have a lot of money to invest, end up not investing at all. Savings is important, but buying assets that appreciate over time is the real kicker to generating wealth. Not bothering to invest due to cost and understanding are the two main reasons why people don’t invest. It’s much easier to spend money on a gourmet meal, a fancy watch, or a nice handbag rather than research and invest in a stock, and then hope it goes up.
2) Go the easy route. People who don’t have a lot of money to invest will often end up buying a market index fund or ETF like VYM or SPY. This is not a bad way to go at all. In fact, this is the way to go for 70%+ of your investment portfolio. Low cost index funds and ETFs are about gaining exposure in a risk-adjusted manner. The only downside is that you lose flexibility in exactly what you can invest. For example, SPY is the ETF for the S&P 500 Index. What if you only like 100 companies out of the 500? You’re stuck.
3) Invest in a risk inappropriate manner. People who don’t have a lot of money to invest may end up investing way more than they should on a particular stock, ETF, or fund because they want to save on commissions. This action can be a penny wise and pound foolish, especially when things go bad. I’ve been guilty of this and lost thousands of dollars by overallocating into one stock. If only I had invested in a bunch of different names, I would have lost much less or made money. It just feels like a waste to spend $79 on commissions to buy 10 stocks.
THE SOLUTION TO BUILDING A DIVERSIFIED STOCK PORTFOLIO
Thanks to the 270 or so participants in my survey on company loyalty, I’ve decided to take a part-time consulting job with Motif Investing (had a good two year run until end of 2016). I’m lucky to live in San Francisco where there are so many innovative companies in the area. I first heard about them when they won best in show at Finovate 2014. I believe in their value proposition for retail investors, but I wasn’t 100% sold until I experienced the pain point of not having the normal amount of money I usually invest in stocks.
For $9.95, users can build or rebalance a basket of up to 30 stocks in a motif instead of spending 30 X $7.95 = $238.5 on commissions at Fidelity, E*Trade, or elsewhere. Meanwhile, if we want to trade in and out of a particular stock in a motif, it costs only $4.95. Furthermore, we can rebalance every single stock in our portfolio in one go for $9.95 in the future. Finally, there are no monthly, quarterly, or annual fees for holding a motif. You can invest as little as $250 to get started. I just chose $10,000.
There’s a great feeling of making money from investing that’s hard to explain. There’s also a terrible feeling of missing out on investing opportunities that you strongly believe will do well. I was planning on buying Amazon and Netflix before their 4Q2014 results, but I didn’t because life got in the way. As a result, I lost out on 12%+ returns. Just in case oil and my favorite tech stocks snap back, I want to participate in the recovery, even if I only invest a much smaller amount that I’m used to.
I’m generally a VERY aggressive investor when it comes to actively investing 20% of my investment portfolio (~80% of my investment portfolio is passively managed and pretty conservative with index funds and structured notes). I’m aggressive because of my experience as a 22 year old who turned $3,000 into $165,000 with one very lucky trade. If I had invested $25,000 into VCSY, I would have been an instant millionaire after taxes! At least I parlayed the $165,000 into a $580,000 San Francisco condo in 2003, which has since grown in value thanks to inflation and a robust economy.
BUILDING MY OWN MOTIF
I decided to bank transfer a lower than desired, but still respectable $10,020 into my Motif Investing account in order to build a meaningful portfolio full of stocks and ETFs I think are attractive at this moment. I added the $20 for commission purposes, but I realized afterward that every new account with at least a $2,000 balance over 45 days gets at least $50 in free trade credit if they make at least one transaction (up to $150 total free credit). That’s me because as soon as the ACH transfer was confirmed, I got to work in building my motif that day.
Originally, I was thinking of just buying around 10 highly speculative stocks to punt around. But then I was reminded that I can buy up to 30 stocks in one Motif for the same price of $9.95. That’s a $228.55 commission savings if I were to buy the same names at E*TRADE or Fidelity, my other two brokerage accounts. Furthermore, $10,000 is not exactly chump change. It can buy half a Rhino, my 2015 Honda Fit beast.
Given I’m all about getting the best deal possible, I decided to do just that by actually building a real 30 stock/ETF portfolio divided into seven main categories: International/Defensive, Internet, Oil & Gas, Autos, Financial Institutions, Property, and Technology.
I built my motif under the following assumptions:
1) Stocks that have corrected and are currently out of favor. Target beaten up stocks that have corrected by 20% or more from their highs. I’m biased towards growth stocks that have brand names.
2) Buy companies I use and understand (the Peter Lynch model). One of the easiest ways to get over your fear of investing, or finding stocks to buy, is to research and buy stocks that you know. Names in my portfolio include: Apple, Yelp, Netflix, Hawaiian Airlines, Chevron, Bed Bath & Beyond, and GoPro.
3) Stocks that may benefit in a low interest rate environment: real estate, home furnishing/remodeling, banks. Rates have fallen off a cliff recently with the 10-year yield now at ~1.63%. If stocks start falling out of favor, real estate and real estate related stocks may be relative outperformers.
4) Stocks that may benefit from a sustained low oil and gas price environment: autos and airlines. Nobody expected oil to collapse by 50% in one year. Airlines have already zoomed higher, but not Honda partially due to supply constraints. Low oil should actually hurt Tesla Motors at the margin, since this makes their product more expensive on a relative basis, but I like their upcoming product cycle. I’m a buyer of oil here, rather than a seller, hence the oil ETF USO.
5) Create a total portfolio performance that severely underperformed the S&P 500 over the past year. Once you’ve built your motif, the platform will show you how it would have done over the previous three month, one year, and five year periods. This particular motif would have returned -15% over the past year, while the S&P 500 returned +16%, a 31% spread. Picking stocks with a downward bias generally leads to more losses over the shorter term as it’s impossible to pick bottoms. My hope is that these stocks will return back to favor if the markets stabilize over the next year.
The Motif Investing interface is very intuitive. It was so easy to pick stocks, build the motif, and choose the weightings with a sliding scale. There are over 150 professionally created motifs by the team here in San Mateo, and there are over 70,000 motifs created by the 100,000+ clients if you don’t want to create your own.
BE YOUR OWN FUND MANAGER
With a limited amount of funds and a strong desire to invest now, I completely understand the frustration of paying expensive commissions that inhibit one from investing. A large part of the reason why I want to save up $100,000 again is so that I never have to feel like I can’t invest in something because I don’t have enough money.
Invest Your Money Efficiently: Betterment, the leading digital wealth advisor, is an excellent choice for those who want the lowest fees and can’t be bothered with actively managing their money themselves once they’ve gone through the discovery process. All you’ll be responsible for is methodically contributing to your investment account over time to build wealth.
In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Let Betterment build a customized portfolio for you based on your risk tolerance.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He is aggressively investing in real estate crowdfunding to arbitrage low valuations and take advantage of positive demographic trends away from expensive coastal cities.
Updated for 2020 and beyond.