# 26 year old needing advice



## TinSoldier (18 April 2014)

Hey everyone, 
Im a complete beginner to all of this but wanted to ask some advice if I may. Hopefully the following will make sense.. 

Im 26 and have a part time profession. Over the last few years I have saved a good sum of money but have regretfully been too scared/lazy/busy to invest my money so far. Im single, am not tied down, and my money needs to be working for me not just earning interest in a bank account. In a perfect world what I would like to do would be to supplement my current income each week. As I stated before I have absolutely no experience in the share market, but im interested and smart and do have a few days a week at least free to spend learning. Once the ball is rolling however I ultimately dont want to have to spend too much time managing it.. idont want to live and breathe the stock market -I have other careers and passions that I want to focus my time on, im really looking for a way to get my money working for me on the side without having to look over it all day. 

Is what I suggested possible or is it a pipedream, and what should i look into.. Dividends, speculative trading, long term investment etc?

How long would it take to train myself to do this with any chance of success? 

And I know this is really an unanswerable question, but with say 20thousand dollars, what kind of return could one aim for? 

Thanks for any help whatsoever. Really just looking for some guidance to push my education in the right direction, its a complex world to enter! Much appreciated, 

-H

edit: before anyone suggests property investment, I should mention that given my current career id prefer the liquidity of shares.


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## minwa (19 April 2014)

Its possible, you will need to put in a lot of work learning it. You have to find what style suits you (suits your personality, not which you like), short term trading seems to be out of the question since you don't want too much involvement. So you have to find out if you like long term investment or intermediate position trading or options trading or whatever.

Maybe don't put your whole 20k into it at the start..

Now I will leave you with something: YOU WILL LOSE MONEY. OVER AND OVER.

If you are fine with the above statement and think you can cope with it, then you might have some chance of success.

If that already scares you off, find someone else to trade for you, just make sure they have consistent track record and mainly charges fees based on performance to weed out some of the bad ones.


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## pilots (19 April 2014)

Land is the only way to go, I am 71, I worked all my life in the Oil/Gas game, I had and still have inside info, BUT the biggest money I have made was on land.


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## TinSoldier (19 April 2014)

minwa said:


> Its possible, you will need to put in a lot of work learning it. .




Could you give me any figure on the amount of time roughly..  3 months part time, 3 years full time.. etc.. just a ball park figure, remembering I currently know next to zero.


If you know of any financial advisors/people to trade for me, that you'd presonally recommend, do tell. Im in Sydney if it makes any difference.


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## TinSoldier (19 April 2014)

pilots said:


> Land is the only way to go, I am 71, I worked all my life in the Oil/Gas game, I had and still have inside info, BUT the biggest money I have made was on land.




You mean land as opposed to property?  Do you develop or just sit on it? Can you elaborate further, I'm interested and never really considered this..


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## pilots (19 April 2014)

We bought rental property's, they was all old big blocks, today we can develop as we need to.


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## Julia (19 April 2014)

pilots said:


> Land is the only way to go, I am 71, I worked all my life in the Oil/Gas game, I had and still have inside info, BUT the biggest money I have made was on land.



Might be a bit categorical to say that 'land is the only way to go'.   As with all property, it will depend on timing and situation.   I wouldn't be buying land right now without some very special circumstantial reasons.

Recently I watched as someone who inherited a crappy old house on a large, prime position acre block just went ahead with subdividing before seeking any advice.  He's now around $100K down the drain due to unforeseen council requirements and can't sell the land.


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## pilots (19 April 2014)

Julia said:


> Might be a bit categorical to say that 'land is the only way to go'.   As with all property, it will depend on timing and situation.   I wouldn't be buying land right now without some very special circumstantial reasons.
> 
> Recently I watched as someone who inherited a crappy old house on a large, prime position acre block just went ahead with subdividing before seeking any advice.  He's now around $100K down the drain due to unforeseen council requirements and can't sell the land.




How true, you must hire the right people for the right job, once you have held land for more than ten years it's hard NOT to make money.


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## So_Cynical (19 April 2014)

TinSoldier said:


> I have absolutely no experience in the share market but would like to supplement my current income each week. I do have a few days a week at least free to spend learning however I ultimately dont want to have to spend too much time managing it.. i dont want to live and breathe the stock market.
> 
> with say 20thousand dollars, what kind of return could one aim for? Thanks for any help whatsoever. Really just looking for some guidance to push my education in the right direction, its a complex world to enter! Much appreciated,




20K spread over 5 stocks gives you enough exposure to be worth while but not enough to break you if one of those stocks goes to zero, also keeps the brokerage costs down while giving a decent spread across industry's and some potential to participate in unexpected rights issues and cap raisings etc.

On the other hand you could put everything into an ETF style index fund or perhaps an industry specific ETF or 2, the ASX site has an education section and detailed info on all listed stocks and ETF's etc.

http://www.asx.com.au/education/shares-education.htm

http://www.asx.com.au/products/etf-and-other-etp.htm


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## DeepState (19 April 2014)

So_Cynical said:


> On the other hand you could put everything into an ETF style index fund or perhaps an industry specific ETF or 2, the ASX site has an education section and detailed info on all listed stocks and ETF's etc.




I agree with So_Cynical that this is something to look into.  It represents a low cost, low hassle way to gain exposure to the market and the simplest way to participate in the economy via listed equity.

You asked about expected returns as well.  If you are buy-hold, a reasonable range of expectations is about 8-10% per annum (gross of franking), based on the current market conditions, other factors and long run GDP growth expectations from the RBA.  This figure is pre-tax.

To attempt to juice that up, for the possibility of higher gains, but without promise of such at all...needs to be balanced against what else you can do with your time and how much you value it.  To be stupid, Warren Buffett achieved a return 10% above index forever.  If you were to achieve this, you would earn $2k extra.  Is it worth your time?  You seem to suggest that you intend to spend limited time on this, so it is unreasonable to expect significant gain above the numbers I showed you.

As a prior post indicated, expect some volatility along the way.  All the best and congratulations on saving and thinking about investing it for the future.


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## TinSoldier (19 April 2014)

DeepState said:


> I agree with So_Cynical that this is something to look into.  It represents a low cost, low hassle way to gain exposure to the market and the simplest way to participate in the economy via listed equity.
> 
> You asked about expected returns as well.  If you are buy-hold, a reasonable range of expectations is about 8-10% per annum (gross of franking), based on the current market conditions, other factors and long run GDP growth expectations from the RBA.  This figure is pre-tax.
> 
> ...





Thanks everyone for the very helpful responses so far.  I mean at the moment Im getting about 4.5% from my high interest savings account. If you say I could get approx 5% increase on that with EFTs thats actually only going to be about an extra 1000 a year, plus now all the added risk.  Not so sure its worth it for so little gain, but Ill look into it.  

In terms of time, I'd imagine I'd have maybe a day or two off per week I would be happy to spend managing, on top of small amounts of time dedicated in evenings.  But as you say, I'd have to break that time into hrs and work out if its really of benefit.  

I've watched some videos on Options trading.. this is presented as some sort of holy grail.. high returns, minimal hours and less risk.. too good to be true?

For example... https://www.youtube.com/watch?v=m2hr3sQSqnU


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## burglar (19 April 2014)

TinSoldier said:


> ... I've watched some videos on Options trading.. this is presented as some sort of holy grail.. high returns, minimal hours and less risk.. too good to be true? ...




If it is too good to be true ...


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## DeepState (19 April 2014)

TinSoldier said:


> Thanks everyone for the very helpful responses so far.  I mean at the moment Im getting about 4.5% from my high interest savings account. If you say I could get approx 5% increase on that with EFTs thats actually only going to be about an extra 1000 a year, plus now all the added risk.  Not so sure its worth it for so little gain, but Ill look into it.
> 
> In terms of time, I'd imagine I'd have maybe a day or two off per week I would be happy to spend managing, on top of small amounts of time dedicated in evenings.  But as you say, I'd have to break that time into hrs and work out if its really of benefit.
> 
> ...




Part of the reason why there are higher returns anticipated from equities relative to cash is because of the risk you are speaking of.  The lower the risk of underperforming cash, the lower the expected return will generally be, though not always.  The thing about this risk is the longer you plan on investing the money for, the more likely it is that equities will outperform cash....that's different from saying certain.  Based on the expected annual return of, say, 9% and the volatility of Australian equities being 14%, in any given year, you run about a 60% chance of beating cash.  It's an edge, but not a massive one for a single decision.  

However, if you allow the decision to roll out, and if it is true that equities truly do have a higher expected return than cash then this is the kind of trade-off you can expect with patience:




The more patient you can be, the more likely your patience will be rewarded.  But there will never be certainty and this is why well considered portfolios tend to be diverse.  

As for options....there is no free money there.  It just changes the payoff structure of every $1 you choose to put at risk and gives you leverage. If you haven't entered the market for linear instruments (like shares) going straight to options is like asking a kid who's played Mario Cart to drive a Nissan GTR in Bathurst.  It could be interesting....


Disclaimer: This is not advice. I am not advising you to purchase or sell securities of any nature. I do not endorse Nintendo or Nissan although, for disclosure, we do have Mario Cart at home and kind of like it. A friend does drive a Nissan GTR on race circuits and he's nuts.  Please do your own work.


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## burglar (19 April 2014)

DeepState said:


> ... A friend does drive a Nissan GTR on race circuits and he's nuts.  Please do your own work.




Ya don't have to be nuts, ... but it helps!


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## minwa (20 April 2014)

DeepState said:


> Part of the reason why there are higher returns anticipated from equities relative to cash is because of the risk you are speaking of.  The lower the risk of underperforming cash, the lower the expected return will generally be, though not always.  The thing about this risk is the longer you plan on investing the money for, the more likely it is that equities will outperform cash....that's different from saying certain.  Based on the expected annual return of, say, 9% and the volatility of Australian equities being 14%, in any given year, you run about a 60% chance of beating cash.  It's an edge, but not a massive one for a single decision.
> 
> However, if you allow the decision to roll out, and if it is true that equities truly do have a higher expected return than cash then this is the kind of trade-off you can expect with patience:
> 
> ...




That graph is kind of misleading in the real world. It assumes that you get the average return which will not be the case as returns are distributed highly skewed over market participants.. If you're in the wrong stocks even infinite patience will not save you. Lots of buy & hold investors who refuse to sell (or in other words, are "patient" with their holdings) are still in massive draw down from 2008, 6 years ago. 

Kinda have to disagree about your statement on options too, married puts gives a very good payoff structure compared to naked shares, it is very useful for beginner investors..It's like having a experienced coach sitting in the passenger seat in that GTR with the ability to turn back time if the kid crashes, you are protected, at very little cost.


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## springhill (20 April 2014)

TinSoldier said:


> Hey everyone,
> Im a complete beginner to all of this but wanted to ask some advice if I may. Hopefully the following will make sense..
> 
> Im 26 and have a part time profession. Over the last few years I have saved a good sum of money but have regretfully been too *scared/lazy/busy* to invest my money so far.




These are the 3 key words that jumped out from your introduction and information.

Scared - This is natural for anyone yet to make a trade/invest. There will be no shortage of well intentioned advice on ASF from some very experienced and successful people. However, in the end it will be your decision which investment direction you take. You have mentioned 3 aspects of stock market already - dividends, speculative, long term. My suggestion is take the time to 'paper trade/invest' these strategies, or a combination. I understand your want to make your money work harder sooner rather than later, but by testing methodology and which best suits your risk profile and money management skills, you may find that your initial $20k could have become $10k in a very short period of time. Never put into the stock market what you aren't willing to lose.

Lazy - Not a good quality for playing the market, this is something that you will have to make a serious commitment to changing. You should think of this as a second job, after all what is the point in earning money from one source just to hand it over to another?

Busy - As said before, think of this as a job - a potential source of a second income. Time will have to be sacrificed from other exploits, but be careful of neglecting important personal relationships.....

From your comments on weekly income supplementation and not wishing to live and breathe the stock market, the speculative end and day trading are not for you.

Dividend stripping may be an option for you to consider..... It requires timing and some foresight as to the approaching 3-6 months to find the right opportunities, but if you miss some divvies here or there it's no biggie the next ship will sail past in the blink of an eye.

Congrats on your achievements to date, best of luck in the future.


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## Julia (20 April 2014)

minwa said:


> If you're in the wrong stocks even infinite patience will not save you. Lots of buy & hold investors who refuse to sell (or in other words, are "patient" with their holdings) are still in massive draw down from 2008, 6 years ago.



+1.


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## ROE (20 April 2014)

These forum can be helpful but it can turn you into Analysis paralysis if you starting out and have little knowledge
Everyone has their 2c .. 

I reckon juice up on the fundamental, take time to learn, dabble a little and learn along the way 

Test your ability and know what kind of a person you are and what return is capable with your
knowledge and experience ... you can learn the principles but only you can come up with the right strategy, risk and techniques that suit you ...following someone else game is futile.

4% isn't bad earning while you acquire knowledge.

Good luck on your journey


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## DeepState (20 April 2014)

minwa said:


> That graph is kind of misleading in the real world. It assumes that you get the average return which will not be the case as returns are distributed highly skewed over market participants.. If you're in the wrong stocks even infinite patience will not save you. Lots of buy & hold investors who refuse to sell (or in other words, are "patient" with their holdings) are still in massive draw down from 2008, 6 years ago.
> 
> Kinda have to disagree about your statement on options too, married puts gives a very good payoff structure compared to naked shares, it is very useful for beginner investors..It's like having a experienced coach sitting in the passenger seat in that GTR with the ability to turn back time if the kid crashes, you are protected, at very little cost.




I had hoped that the assumptions behind the graph were clear from the thread context and flow.  They are, as I think you are fully aware, based on my assumptions for an ASX ETF.  These can clearly be wrong...actually they will almost certainly be wrong.  C'est la vie with assumptions.  Under those assumptions a chart was produced to assist with gauging risk.  Until that time, nothing had been provided along these lines.  You are absolutely correct that I have not made allowance for what others might do in their portfolios, there is no way I can make assumptions and offer analysis for every possible mix.  I agree that the figures would be skewed...probably to the downside (without you saying) given frictions.  However the graph is the outcome under the assumptions made and doesn't claim to be anything more.  Nonetheless....thanks for raising it.

The ASX 200 Accumulation index, which includes dividends, achieved a new high in 2013.  If you were to value franking, this would have been achieved in 2012. This is from the absolute lowest point in March 2009.  Not bad, for a recovery from the greatest market correction (globally) since the Great Depression. 

Certainly, some people would have done worse than the average and taken losses...of course they will have.  They may have been buy-hold and lost, they may have traded and lost.  They may have sold stocks that went down and bought others that continued to go down.  On the other side are many good news stories.  The chart is a probability statement on the basis of buy-hold.  The probability of underperformance includes allowance for the possibility that the investor will holds dogs all the way down.  It also includes the possibility that they won't.   

I can see where you are coming from on the married puts.  My point of divergence comes when, at risk of analysis paralysis (what is the 'right' amount of analysis and yes, you have to learn, but your education can be cheap or expensive), you ask yourself whether the options are cheap...as opposed to low cost.  Here we go...

In the options market there are a reasonable number of people who buy lottery tickets in the form of deep out of the money calls.  This pushes up the implied volatility of the extreme call wing.  This is largely balanced against the collar activity and buy-write activity.  In other words, there is reasonable tension on the calls for the most part, although search for yield effects are compressing implied volatility.  ie. Calls are probably priced fair to cheap on the upside wing.  

On the put wing, there are many people, including funds really big pensions and sovereign funds who think as you do.  They seek an insurance policy.  There are few natural investors on the other side.  This makes the puts expensive relative to their fair value...not least because of the difficulty in hedging the risk out for the market makers.  So right there, the puts are expensive right across much of the curve, but increasingly so as you move into 'insurance policy' levels of exercise price relative to current (or, more accurately, delta).  If you are saying these things are 'low cost' they would probably be of this category, I'm guessing  that would be the usual structure.  Downside protection of maybe 5-10% for a 3 month maturity is pretty standard. 

Low cost is not the same as cheap.  These are expensive and hence can be expected to lose you money over time relative to LIBOR (Interbank Cash - at a return well below the high cash rates currently being received by TinSoldier).  The cost is such that it makes for a reasonable allowance for the aversion to losses.  However, it could be that TinSoldier has massive aversion to loss, in which case...they should scale back their investment.

In addition, there are spreads and rolls which are wider relative to fair value for such contracts, further eroding the sense that these are good investments.  The expected return from these puts is actually going to be well below LIBOR in aggregate.  You need to take money out of the market to buy these things which are expected to earn less than LIBOR.  This reduces your expected return, increasing your chance of underperforming cash, although the size of major loss, if incurred, over short time periods might be less severe.  Over time, this washes out. 

One other thing.  If you are rolling 3 month puts, which is into the maturities that the market gets meaningfully active for the wings, you are insuring outcomes for each quarter.  If TinSoldier has a medium term horizon, there is no need to insure the outcomes every quarter.  It's like insuring every stage of your hot lap around Bathurst is reasonably  fast when what matters is the outcome for the whole lap or, more accurately, the whole race.  That's a form of over-insurance.  If TinSoldier is unable to handle equity volatility, the position size should probably be wound back instead.  That produces the better EXPECTED outcome over the long term.  Naturally variations to this will exist.

Finally, I guess my point was that there is no free money in options.  It's not like they are a money machine for you to extract returns from just by turning up. And they are more complicated than plain shares to understand.  You need to understand shares first before their derivatives.  Start with ABC, DCF and then move to Delta, Gamma, Vega, Rho and Theta.  That's all.

Cheers


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## minwa (20 April 2014)

DeepState said:


> you are insuring outcomes for each quarter.  If TinSoldier has a medium term horizon, there is no need to insure the outcomes every quarter.  It's like insuring every stage of your hot lap around Bathurst is reasonably  fast when what matters is the outcome for the whole lap or, more accurately, the whole race.  That's a form of over-insurance.  If TinSoldier is unable to handle equity volatility, the position size should probably be wound back instead.  That produces the better EXPECTED outcome over the long term.  Naturally variations to this will exist.
> 
> Cheers




It is the same as insuring your house or car, you renew it every time if you don't want to take the risk. Either insure it all the way or don't insure at all. It's not over-insurance. The time you don't insure may turn out to be the time you need it the most, you cannot predict the future.

Cutting position size does not make sense if you are using a stop, you are insuring a gap through that stop, something you cannot predict or control. 

Do you cut back your "position size" aka your chips and buy a corolla instead of the GTR because you can't handle the "equity volatility" aka chance of crash ?

I'm not a fan of the expected outcome, it's all based on theory and assumes you are a machine with no emotions. Very different to the real world IMO.

Nevertheless, good discussion..if it works out for you, great.


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## DeepState (21 April 2014)

minwa said:


> It is the same as insuring your house or car, you renew it every time if you don't want to take the risk. Either insure it all the way or don't insure at all. It's not over-insurance. The time you don't insure may turn out to be the time you need it the most, you cannot predict the future.
> 
> I'm not a fan of the expected outcome, it's all based on theory and assumes you are a machine with no emotions. Very different to the real world IMO.
> 
> Nevertheless, good discussion..if it works out for you, great.




Yeah, good discussion.  Many roads to Rome.

Glad you raised the house and car insurance example.  Let's run with it.  You want to insure your house and car.  You want to be able to live in your house and drive your car, restoring it to workable condition if you encountered a mishap.  For TinSoldier, the longer his investment horizon, the insurance should simply be over the return not being well below say, cash, over that horizon.  That's his house and car.  Return over investment horizon.  What happens along the journey is actually irrelevant.  All that matters is the end result. He can be insured, for this example.  The longer the return horizon, the lower cost of the put until it almost vanishes.  Compare that with insuring every quarter which is certainly not zero.  That difference is over-insurance.

Expected outcome is important.  You must be a fan of it because you are acting in a way to get higher expected returns or you probably wouldn't do it unless you regard this as just entertainment or something like it.  But, I think you mean that volatility is important too and the pain of the journey.  Absolutely no argument there.  Warren Buffett has said that you don't need any more IQ points than 130 to do well in the market.  Anything more than that, trade them in for temperament.

My view is that, for the most part - particularly for a newbie - if you can't hack the heat cut back your position size until you can.  The longer you are prepared to think about, the more you can hack.. What are you doing in equities if you can't think out quite a few years?  Yours is to enter full position size with insured stops.  I have outlined why married puts are likely to underperform full sized buy-hold.  That gap is the price for temperament.  So there's no answer...it depends on your temperament.  But that's the cost.  You will increase the chances of losing money against cash for the benefit of placing a floor under your returns for an ASX 200 ETF.  But you might sleep better along the way.  It's true, that's not to be underestimated.  But you can either insure at net expensive, or reduce position size.  Both become more comfortable the longer your horizon is and actually become closer and closer to the same thing.

As for cashing chips in if you can't handle the heat (moving to a Corolla!! love it)....I just ran some figures based on the ASX ETF assumptions and allowing for skew that would be priced in for a 3 month option.  The option is for a loss protected at 5% downside relative to current price (allowing for 1% to be earned from dividends). The option does not 'cost' much at about $2 per $100 face value protected.  But by buying protection, the way options work, it actually takes you out of the market.  In this case, delta is -0.23.  Roughly, buying married puts is akin to turning up at the casino, putting 100 chips down and then putting your arms around 25 or them before any play takes place at all.  You cashed in before you started.  This is why protecting costs you as well.  It holds you out of the market, and you pay negative odds for the privilege.

Overall, I know I couldn't handle a monster draw down and survive it without a lot of insomnia. I ensure that I can handle the losses via adjustment to position size and do take additional steps to defend the extreme edges.  But these are truly extreme. Some of these steps include taking synthetic option like protection with weird pay-offs that suit my purposes.  So...TinSoldier...this is not black and white and it is clear that Minwa has made great points.  Hopefully this playful contest of ideas has helped to add to your state of confusion, analytical paralysis and so on.  It helps to appreciate there are, indeed, may roads to Rome.  When the fog clears a bit, hopefully you'll discover a path that is right for you.....like most of us, find that it isn't...learn and keep looking/learning.

Good trading Minwa


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## minwa (23 April 2014)

I think this is getting too off topic but there is something wrong with your chips example.

Marrying a put in your example would be starting with 100 chips and spending 2 chips to protect 92 (95% of 98 chips) of your chips for your next 30 play/rolls (expiry). Dosn't matter how many you lose in the next 30 play, you will come out with 92 chips. Bet everything and lose you can still walk with 92 chips..that is very different to putting your arms around 25 chips and using the rest to play.

Reducing the position size as you have suggested means playing with say, only 50 chips, with half the upside potential of the married put. You can also still lose 10,20, even 50 of those chips.


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