Opening an account
You need a brokerage account that will allow you to buy individual securities — stocks and bonds — with a minimum of hassle or expense.
When I Google around and find some best-brokerage lists (e.g., Nerdwallet, Forbes), some things on my mind are…
I have a strong bias against anything new or faddish. I don’t know anything about Webull other than the fact that its name tells me it’s fresh from StartupLand, but that’s enough for me: I don’t want to entrust my savings to anything cute. Cute things are not durable.
Similarly, if Wall Street and Silicon Valley are trying to sell me something “disruptive,” I’m pretty sure I don’t want to be anywhere near it. Robinhood makes the cut for the Nerdwallet people, but, like Webull, the name itself is a sales pitch, and I don’t trust it.
To put it another way, does your average investment banker at Goldman Sachs or Morgan Stanley have a Robinhood account? I’m gonna guess no.
(Reading up a little further, I can find plenty more reasons to be a Robinhood hater. The financials also look sketchy.)
Interactive Brokers is what a lot of professionals use, but it’s too fancy and complicated for most of us.
I don’t get strong “cute” or “disruptor” vibes from an all-online banking/student loan profiteering place like SoFi, but I also don’t get “built to last” vibes either.
Hilarious to me that the pinstriped suits at Forbes of all places are pitching something called tastytrade?!? That’s a big no.
Schwab, Fidelity, e*trade, maybe TD Ameritrade — these are all reputable and solid. I have an account with Schwab and I opened a Roth IRA for my wife with Fidelity, mainly to see what another platform was like and not have all our eggs in one basket. Of the two, I find Schwab cleaner and easier. (No, nobody’s paying me to say this. I wish.)
FYI I don’t think anyone charges fees anymore. I believe Robinhood blew that up for everyone, so you can pretty much buy and sell stocks for free now.
Schwab charges me $6.95 when I buy ADRs (American Depository Receipts) of overseas companies like Alstom (ALSMY), so if I’m going to buy something in that vein, I buy at least a few hundred dollars’ worth or it’s not cost-effective. Beyond that, it’s free.
Anyway, it’s just not that hard. Google around for ten minutes. Find a brokerage you can get with. Click “Open an account.” You’re a smart person. You can do this.
What kind of an account?
A Roth IRA is always best if you don’t have one already.
For years, I went around with a nagging sense that I was supposed to open a Roth, but I had no idea why. So I just felt guilty and stupid about it. If you are in the same boat, let me relieve you of the burden: all Roth means is that you pay taxes on the money the tax year that it goes in; then everything that you take out on retirement, everything that has compounded in the account, is tax-free.
A Roth is just a savings bucket. You can do whatever you want with the money in the bucket — invest it or let it sit in cash — but you don’t want to take it out. Once you’ve committed money to your Roth IRA, you should think of that as money you can’t touch until retirement.
You do need to keep track of the contribution limits for the Roth — starting in 2024, people under the age of 50 can contribute up to $7,000 per year and people over 50 can do up to $8,000. There are income caps on this, but they are, like, rich-people income caps — if you are married filing jointly and making more than $240,000 a year, you probably already have a good investment system or some kind of advisor you pay to do the thinking for you.
Remember, too, that IRA contributions have to be “earned income” — you can’t deposit, say, an inheritance or income from a rental property there. It has to be money that you get from employment and have a W-2 (employee) or 1099 (contractor)
If you already have a Roth and it’s already maxed out and you’ve already invested that money, then a) pat yourself on the back for being so on it!, and b) open a regular old brokerage account. You can put as much as you want into your brokerage account, but anything you make (dividends, bond coupons, capital gains if you sell) is taxable that year. If you are just getting started, though, these will be negligible, especially since we don’t plan to sell anything unless we really, really have to — e.g., if our thesis on the investment is broken. You’ll see the effect on your tax returns when you are actually making real money from this, but that’s a long time away. For now, you’ll just get your annual statement, fold it into your tax return, and it will be inconsequential amounts.
OK now what?
Link your checking account to your brokerage account.
Transfer some modest sum of money, whatever you feel comfortable saying goodbye to and not needing to touch for 10-15-20 years. Ideally, you are investing at least a few hundred dollars a month, but if you are feeling pinched, do fifty. Just do something.
(I’ll keep saying this, but if you haven’t yet, now is the time to commit yourself to the principle of Pay Yourself First. Before you pay the phone bill, before you give your money to the grocery store or the gas station or the landlord or the restaurant, give some amount of money to Future You. The restaurant owner will get your fifty dollars and it will be just fifty dollars, but Future You will inherit hundreds and hundreds of dollars from those fifty bucks. Give Future You that money! Future You needs that money!)
Wait a few days for the money to transfer.
Once you have some $$ in the account, buy something undervalued.
How to decide if something is undervalued or not is basically what billionaire investors have dedicated their often-sad-or-creepy lives to figuring out. We’re not exactly going to master valuation right here in our shiny new brokerage accounts. But again, we have to start somewhere.
For the sake of an example, let’s say that we think Verizon stock is undervalued. The company carries a massive load of debt, the telecomm industry is notoriously hard to succeed in, and T-Mobile is growing much faster than Verizon. But VZ is selling at a pleasantly low price-to-earnings ratio of 7.63, it pays a big fat 7% dividend, and people will just keep paying their phone bill, so we can expect our forty-dollar shares to be worth significantly more in ten years. It’s also just a regular old dumb old company—that is, it doesn’t make us feel complicit in some great evil.
(I use T-Mobile’s cell service, I don’t even know why anymore, but either way, I’m already part of the whole big thing by having a phone etc. etc. So owning stock in one of these companies directly rather than in the nice easy sanitized way of through a Vanguard fund or a TIAA-CREF fund feels like… not a big deal.)
(FYI I don’t love the Motley Fool, and I don’t necessarily buy what they are selling, but FWIW here’s their take on T vs. TMUS vs. VZ.)
Anyway, at some point you have to just get over the hump and go for it. Type a stock name or symbol into the little “Quote” box somewhere on the screen. When the stock you want comes up, you click on it, then click “Trade.”
There are different kinds of trades you can make. Don’t overthink it. Typically, once you have something that you like at a price you like, you can just buy the number of shares you want at “Market” price. That means you will pay the price that the stock is going for at that exact moment, which might be higher or lower than it was or will be later in the day.
You have to check the bid-ask spread before you do this. If you think you’re buying something for $10.22 a share (the large-font quoted price at that exact second), but the “Ask” (smaller-font) price is actually $13.07, your “Market” buy will be for $13.07. Typically, the bid-ask spread for not-obscure stocks is tiny — buyers are bidding $24.33, and sellers are asking $24.34. That’s a safe Market buy for us.
If you want to set a specific price, then you place a “Limit” order, which tells the brokerage “Only buy this once it gets to the price I want to buy it at —$10.22 (or whatever).” Then you have to decide if you’re going to leave that offer out there for just the day or for the next few months — “Day Only” or “Good Till Cancelled.”
The difference between Market and Limit can make a big difference sometimes, but often it’s small potatoes.
Remember: the longer your time horizon, the less the small potatoes matter. Time is the key. Patience is key. Compounding is key. Rationality and steadiness are key.
At the same time: the price you pay does matter. So you want to try to buy something good that is also cheap that will also grow over time. It is “simple but not easy,” as the investing maniacs say.
I am largely (but not solely) focused on stocks that 1) pay a growing dividend, and 2) have a DRIP — Dividend Reinvestment Program. This means that if you buy something good and hold onto it for a long time, you accrue more and more shares of that stock over time. Eventually, the goal is to “turn off” the DRIP once you are retired, and you can collect the dividends of a much larger share of stock without touching your principal.
So when you buy a stock, when Schwab or whoever asks you if you want to “reinvest dividends,” you check the “Hell Yes” box. (J/K it’s just “Yes.”)
Markets are closed today for Martin Luther King, Jr. Day, but if I was buying VZ right now, the big-font price is $38.48, the bid is $38.45, and the ask is $38.53. So if I had $150 in my Roth or my taxable account to spend there, I could Buy three shares, select Market, check Reinvest dividends, and then be done with it, knowing that it would come out to a little less than $120. Or if I was feeling really careful and frugal, I could select Limit, select Good Till Cancelled, choose a price of let’s say $38, and know that if the price dips a little further, the order will fill and will cost me exactly $114 for three shares.
$50 a month / $600 a year isn’t much, but the idea here is that you can get started even with that little. You buy something new every month, or you add to one of the positions you already have, but you keep building. Sometimes we’re looking to get something new, sometimes we see that one of our positions has fallen in value, but we are confident it’s still worth owning, so — and here’s the part you want to get into — we are happy our shares have lost value. Why? Because it means we can buy more for cheap. Because things can fluctuate so much, I tend to try to wait until something has fallen at least 10% before I buy on more.
Big picture: If you make a lot of those small purchases of different (good/cheap/growing) stocks up front, and add to them steadily over time, you could have MANY little dividend payments being deposited in your account at random dates every quarter in fifteen or twenty years’ time — thousands of dollars of steady annual income, without having to touch the principal. At our modest level of saving, it’s not millions of dollars. But it’s the passive income that allows you to grow old without being afraid of being broke. It’s just money being deposited in your account for you to live on. Unless you are saving truly significant amounts of money it’s not enough by itself, but in conjunction with whatever else you’ve put together, plus Social Security, it allows you to have multiple income streams. And it's invested in something you don't hate yourself for owning. And because you are buying things in increments (dollar-cost averaging, it’s called) rather than having a million bucks and plowing it all into the market at once, you are less freaked out when the market goes down, as it always does. The stock market goes up and down, and you could see painful down years or even the fabled “lost decade of stocks,” but because you are buying individual stocks rather than the market as a whole, and because you are reinvesting the dividends steadily, if you wait long enough, you will have a secure income stream when you are old.
TL;DR
1. Open an account.
2. Buy something good, cheap, that will grow.
3. Reinvest your dividends.
4. Do nothing. Don’t panic sell. Don’t try to be clever. Just sit and wait.
5. In the long term, collect cash dividends to live on, without having to touch the principal unless you need it.
Thank you for reading, and good luck!