Since You AskedQ&A
Since You AskedConfused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
WHAT IS THE BEST INVESTMENT?
Recently, I inherited some money and have been deluged with people offering me great advice on how to invest this money. I don’t really understand the markets very well, but I was given your name from a friend in hopes that I could learn more.
I have been reading that the stock market has been growing at rates from 5–12% or even more. Brokers tell me that long-term stocks are the best investments. I realize they make their money from investors who buy and sell stocks, so I have to question their motives.
I was told to look into mutual funds as well. There seems to be hundreds of different funds sold by many different brokers.
Can you shed some light on the numbers above? Do you have any suggestions for me? I don’t need income or use of this money for some years. — Cesarsghost
Your questions remind me of my seven years of doing our radio show, Stocktrading With The Bright Brothers. Even though we focused on trading stocks for a living, we would always do our best to answer all questions asked. You are right about brokers or investment advisors; always do your own due diligence.
First off, let me explain a bit about “returns” and “growth.” There are many ways to determine if the overall market pays off more than inflation. Let us start with the Dow Jones Industrial Average (DJIA). This index consists of 30 large-cap equities. Those equities determine the average value to get the index value — and this can be tricky. Of the original 30 stocks in the DJIA, I believe only one (GE) is still in the DJIA. The components are changed periodically; some call this “replacement accounting.” So if you had invested in all 30 original stocks, you would not have much left today.
The same thing applies to the S&P 500 stocks, except that the S&P has 500 large-cap stocks vs. only 30 for the DJIA. This index is controlled by Standard & Poors, and they too replace symbols from time to time. So it is doubtful that the overall markets have returned anywhere near the numbers you were told.
Be sure to ask your accountant about the tax ramifications stemming from long- and short-term investments.Enter the world of exchange traded funds (ETFs). I believe the first ETF was formed in 1993. It was, and still is, called the SPDR (SPY). The exchange traded fund is an alternative to the old mutual fund model, and one I prefer. The SPY or the DIA (that is, the ETF for the DJIA from Dow Jones) very closely track the index they mirror. They are better because the fees are much lower than what you would pay to a mutual fund manager, and you can trade them easily with your computer at home. They allow for intraday buys & sells; in fact, many traders make a living trading ETFs intraday.
Since these ETFs mirror the overall markets and their components tend to keep up with the basic replacement accounting, your returns would more accurately reflect the overall market moves vs. buying individual stocks.
Be sure to ask your accountant about the tax ramifications stemming from long- and short-term investments. In addition, find out the tax benefits from collecting dividends on individual stocks. It won’t take too long to see if you’re better off with ETFs or individual securities.
Another rule of thumb is diversification, of course. Some like to allocate a portion of their investment dollars to gold or silver. Rather than get bogged down with physical gold or silver, I suggest you look at GLD or SLV as the ETF surrogate. The bid/ask spread on physical gold can be very costly if you want to get in or out quickly, but that is not the case with the ETFs. Other forms of diversification can go to real estate. Another way to invest in that market is to look into Real Estate Investment Trusts or REITs. Again, consult your CPA regarding the various types of and pertinent tax treatments.
Of course, this advice is given for educational purposes only, and does not reflect the opinions of Bright Trading, its affiliates, or Technical Analysis of Stocks & Commodities magazine. It does require some research to make yourself comfortable with your investment decisions, but at least this might help get you started. Good luck!