Have $2500 to invest and have some questions

[Wilks]

Hello all my name is Brian and I am new to this community and am happy to be here. I have a few questions and hope that some of you can help me out.

Well here is the deal. Right now I have $2500 to invest and plan on adding to this total every month. I want to invest in the stock market but I have a few questions and if anybody could answer I would appreciate it greatly. First off let me say that I am in this for the long term as I am 28 right now and want to keep building my porfolio for the rest of my life and this is going to be my starting point. Here are some questions that I have:

1) What is the best way to begin in the stock market? For instance should I start out building my portfolio by buying Blue Chip stocks and large companies that might not offer big returns but also will not lose all of my money?

2) Another thing is do I buy a few shares at a time or wait until I can buy say 100 shares at a time? Example: With my $2500 should I buy 100 shares of say Dell, or should I buy 20 shares of MSFT, 20 shares of GE, 20 shares of MCD.....etc. etc. until the $2500 is completly invested and then reinvest in all these companies with future deposits?

3) After investing in these companies do I just sit on the stocks for the next 40 years or should I be buying and selling them every couple of years? I understand buy low sell high but if I just hold on to the stock shouldn't they be giving me a nice return as the years go by?


Sorry this got so long but I really would appreciate ANY feedback that I could get. I am really into learning everything that I can about stocks and the stock market right now and always have had a great interest in it just have been nervous to get started. Thank you for all your help.

Brian

[aquaswim47]

Welcome Brian to the community; it is a pleasure to have you. We're all looking forward to your future postings and replies.

I think you follow Cramer's advice, you read the financial statements of the top ten or 25 companies in each mutual fund or ETF to evaluate the fund manager's picks. That way you're looking out for your own interests; it is even more important for you to read the financial statements if you are looking at individual stocks. If you take that route, you have to also do research via conference calls/annual reports before investing in individual companies. Invest between $500 to $1,000 in companies in at least $250 intervals, than move on to the next company. So with $2,500, you could buy five companies in 2 intervals or 10 companies each with $250 invested. You are most likely to succeed through a well-diversified mutual fund than you will with individual stocks.

I wish you invest well and wisely.

If you have $2,500 to invest, I would suggest a passively-index mutual fund with Fidelity through Fidelity brokerage. If you have $3,000 to invest, I suggest Vanguard. Some other reasonable options through a Scottrade broker would be Pax World Balanced Funds, Wilshire Funds, or ValueLine Funds. You want to use Scottrade to avoid a maintenance fee you would have through the broker itself and these funds are no-load, NTF fee funds with low to moderate expense ratios. With $3,000+, Vanguard Funds becomes another option, directly through Vanguard brokerage. Since this is long-term money, you could consider an aggressive growth fund or a value fund that invests broadly in companies. One example of an aggressive growth company is VLEOX - Value Line Emerging Opportunities Fund which invests mainly in small company issues or FIGRX - Fidelity International Discovery Fund. Two examples of value funds include Fidelity Value Fund (FDVLX) or its cousin Fidelity International Value Fund (FIVLX). A blend fund would be a mutual fund such as VGTSX or VTMSX through Vanguard. All of these are recommended; it is important to pick the fund that is consistent with your investment strategy. One advantage that Fidelity and Scottrade allow are dollar-cost averaging, while Vanguard needs an initial deposit of $3,000. From what you indicate, I would suggest FDVLX or FIVLX as a probable starter investment.

Proshare Funds is an exchange-traded fund (ETF) that provides the ability to be more speculative on high-quality issuers. For example, they have a fund that doubles the risk (and return) of the Dow Jones industrial average. Low cost options include VTI (large companies mainly) or IOO international.

Another option is to buy five companies and make sure they are in different sectors of the market. One company should be a tech company, a retail company, a financial company, a biotech or consumer products company, a telecommunications company, a defense company, a healthcare company, oil/energy, or a conglomerate company (like GE, CAT, UTX, etc).

A great portfolio might consist of:

GOOG/MSFT/CSCO/SUNW - one tech company
MCD/JCP/SHLD/PNRA - one retail/restaurant company
RDS.A/OXY/SUN/XOM - energy company
JNJ/GSK/MRK - consumer products/healthcare company
UTX - conglomerate

or

WM - financial
TEVA - pharma company
LMT/GD/Northup - defense company
CAT - conglomerate
T - telecommunications

[gijoe9]

Hi Brian and welcome to the FIO. Your questions convince me you have already started to learn about the stock market. I would suggest that you continue to learn about the stock mraket by taking advantage of the free simulator at Investopedia.com - Your Source For Investing Education (one of our sponsors) they have tutorials as well as a tremendous data base of stock related info.

As to your questions:
The best way to get into the stock market is your way. I mean that you should feel confident in your aproach. Your first example is a good way to go if you feel less inclined to risk. As far as diversity goes that is dependent on the costs of transactions as a percentage of the total invest. If you have 2500 to start and were going to invest 100 each month you could invest 500 in five companies then each month invest another 100 in one of the five in turn. If the cost of the purchase were $7.99 that would mean your cost each month would be 7.99% the anual return on your investment would have to be greater than that for you to make any money.
Here is what I would do with that money if I were into the blue chips and were going to add cash regularly to my holdings. I would go to the money paper and get into a DRIP (Dividend Re-Investment Plan) they have there or to sharebuilder. I know little of sharbuilder but have used the money paper. They offer a subscription to the "money Paper" it lists companies that have DRIPs and they offer reduced fees to enroll you into different plans (non subscribers pay higher fees) To me this is the safest way to get your "feet wet" in the market.
My proceding statements should have addressed the first two questions. Your last question is answered thus: If you were to have bought 100 shares MSFT when it went public you would have about 28800 shares at $28 a share or $806,400.00 so in some cases the 40 year hold might be good however, selling something will depend entirely on your objectives for a stock. If you want to get in make a few $$'s and get out your criteria for selling will be different then the buy hold and dollar cost average plan. This is not to say that a long hold position will never be sold as Enron taught many even a blue chip can go down hard and fast it would be better to sell and retain a few dollars then to go bust on a position. You cannot just buy it and forget it you must stay involved with what is happening with all the companies you hold you are one of the owners after all.
Lastly I would like to re-iterate my welcome to you and to encourage you to pursue stock market education vigorously as this will ultimately be the difference between success and failure. Please feel free to ask as many questions as you like people here are very eager to help the only silly question is the one you do not ask. Good luck!

[WallStGolfer31]

I would highly suggest you just buy SPY. It's the S&P 500 index ETF. Ease in by spreading out your $2500 entry over many month/years and continue to buy it each month with your deposit.

No matter what anyone else may say on here if your investing in the long term, as a long-only investor, indexing will provide the best risk-adjusted return, no question.

[aquaswim47]

WallSt.Golfer, SPY and DIA are good investments; DIA is Dow Jones Industrial Average and SPY duplicates the S&P 500 index.

If you have a real long-term view, consider SSO or DDM as these fluctuate twice as much as SPY and DIA, respectively. The fees on SSO and DDM are higher, but they allow you to get twice the market return or loss, thus over the long-term, you'll be better off in these investments.

The more risk you're willing to take, the more likely you can get an above-average market return; the rate of return with margin is greater than on a cash basis. SSO and DDM allow you to invest with margin and only use a cash account (plus no fear of a margin call).

[WallStGolfer31]

Originally Posted by aquaswim47

WallSt.Golfer, SPY and DIA are good investments; DIA is Dow Jones Industrial Average and SPY duplicates the S&P 500 index.

If you have a real long-term view, consider SSO or DDM as these fluctuate twice as much as SPY and DIA, respectively. The fees on SSO and DDM are higher, but they allow you to get twice the market return or loss, thus over the long-term, you'll be better off in these investments.

The more risk you're willing to take, the more likely you can get an above-average market return; the rate of return with margin is greater than on a cash basis. SSO and DDM allow you to invest with margin and only use a cash account (plus no fear of a margin call).

Actualty those pre-leveraged shares (SSO and DDM) have the exact same risk adjusted return as SPY or DIA.

[aquaswim47]

So Wall St. Golfer, are you suggesting that by having SSO or DDM that you're risk neutral; in other words, you don't get any marginal return for the additional risk taken on? If that's the case, he should invest in SPY or DIA. Or is it, that you get additional return due to the additional risk but on a risk/return basis, it's neutral?

Good points. I welcome your feedback.

If you bought DIA, and deposited 50% in a margin account, you could invest in 200% of DIA. Assume that DIA has a normal rate of return of 11%, an 8% margin rate, and a 12% standard deviation; it would imply that you would have a 14% average ROR (11% x 2 - 8%) and a standard deviation of 24%. The fluctuations in value would be double of the DIA investment; the investor deems a marginal return of 3% to be worth taking on double risk for the index. That means that DIA in a cash account would lose 1% if the index was one standard deviation below the mean, 13% if it was 2 standard deviations below the mean, and 25% if it was 3 standard deviations below the mean. Likewise, if it was 1 standard deviation above the mean, you would earn 23%, 2 standard deviations, 35%, and 3 standard deviations, 47% above the mean in a cash account. In a margin account, one standard deviation below the mean would be a staggering 10% loss, 2 standard deviations would be 34% (and a margin call would probably occur), and 3 standard deviations would be a 58% loss. Likewise, if you were one standard deviation above the mean, you would earn 38%, 2 standard deviations would earn 62%, and 3 standard deviations would earn 86% (2 X 47% - 8% margin interest rate). The problem with buying DIA on margin would be if you had a margin call, you would lock in your 60% loss and thus would have to see a 150% increase in the value of your new investment just to break even.

In a recession, one standard deviation might be a flat year (as the investor incurs only a 1% loss). Two standard deviations might be like what happened during the 2000-2002 era. Between three and four standard deviations would be like the 1987 crash, and the Great Depression was five standard deviations below the mean for an average of four years (late 1929 to early 1933) since the Dow plummeted approximately 90% (an average rate of decline per year of 49% which is 5 standard deviations from the mean).

One standard deviation, either positive or negative has about a 31% chance of occuring, 2 standard deviations has about a 6% chance of occuring, and three standard deviations has about a .3% chance of occuring (very rare). These are all assumptions.

[WallStGolfer31]

Originally Posted by aquaswim47

So Wall St. Golfer, are you suggesting that by having SSO or DDM that you're risk neutral; in other words, you don't get any marginal return for the additional risk taken on? If that's the case, he should invest in SPY or DIA. Or is it, that you get additional return due to the additional risk but on a risk/return basis, it's neutral?

It's not risk neutral, that would imply there is no effective risk; SPY and SSO have the same risk-adjusted return.

Let's say SPY returns 10%, since it's the index it's risk-adjusted return is just 10%.

If SPY had a 10% return, then SSO had a return of 20%, but it also had twice the deviation (inherent due to the shares properties) of the index (SPY) thus it's risk-adjusted return is also 10%.


This is the simplest way to adjust for risk, there are other methods to adjust for risk, but this usually works most of the time.