How To Start Investing Or Trading Or Both? (NASDAQ:BND)

We had two outrageous stimulus policies: 1) the Fed’s (without help from the fiscal side) to deal with the 2007-08 financial crisis, and 2) the fiscal policy to counter the 2019-20 pandemic, (which eventually forced the Fed to act).

Both events were completely unexpected albeit the former was endogenous while the latter was exogenous. The somewhat unprecedented economic policy – monetary and fiscal – affected not only the economy and the financial market but also stirred society in many ways.

In retrospect, the questions are 1) whether they were the right policies, 2) what is the right normalization policy, 3) what is the right executing procedure. The Fed and the Administration dwell on very challenging positions now.

The stubborn Inflation, the coming Recession, and the controversial Bear market have been the major news headlines in the recent months. The Fed’s rate increase is scheduled this week (Sep. 20 and Sep 21).

The Focus

The article is mainly to write a handy guide about how to start “Investing and Trading” for various investors: 1) active and newly discharged army force, 2) students, 3) new graduates, 4) new employees, 5) new 401(K) holders, 6) new immigrants, 7) new heirs, 8) new divorcees, and so forth.

I have published 20 articles (2012 – 18) which all are self-standing, meaning not just recurrent updating posts but independent ones individually. The targeting investors were mostly elderly (older than 50s).

From my 21st article last week (Sep. 12, 2022), my lens turns to the younger crowd (50 or less), and the investment starters in particular.

My Approach

The top-to-bottom is my base, first looking at: 1) the macroeconomic conditions, secondly checking 2) microeconomic foundations, and then finally analyzing 3) the market data on equities, bonds, and cash (where there are a few variants).

The Current Investment Condition

A recession is not in the near future in my opinion. The major tool to analyze Business Cycles is the Composite Indicators (Leading, Coincident, Lagging, and the inverted Lagging which lead the leading with a long time-lag), and various diffusion indices.

The Terminal (a classic Swedish economist in the late 19th century Knut Wicksell’s or neutral, or natural) Rate (which we can’t directly observe, so simulate with a small New-Keynesian model, reinforced by artificial intelligence – AI) is 4.5%. Hence, the worst inflation (like in 1973 or in 1980) was likely already behind us.

“Knut Wicksell… emphasized the concept of an equilibrium level of interest rate… In his 1898 book, Interest and Prices, he wrote that ‘there is a certain level of the average rate of interest which is such that the general prices has no tendency to move either upwards or downwards.’… In modern language, this level of the interest rate is usually referred to as the natural rate of interest.”

(The Fed Vice Chairman Stanley Fischer’s speech, at the 40th Annual Central Banking Seminar, sponsored by the New York Fed in late 2016).

A bull market (started on Mar. 09, 2009) is still with us, according to my previous article on September 12, 2022. Currently, the S&P 500 has moved along the bear market surface set up on June 17 ($3636.87, that’s not intraday but closing price): 1) two weeks minus Momentums, 2) one week’s + M, and 3) one – M again last week. When will we have a solid uptrend? Nobody knows.

The Investment Advice

As a long-term (5 years or longer) investor, you can start investing anytime (either an upswing or a downswing or a trendless, or a choppy or whatever): It really matters little.

The only matter is to select minimum cost and best quality investment products and the services of brokerages and mutual companies. You have to shop around extensively, by viewing the right sources.

You are better off to ride the smooth and steady bull market which is normal, rather than the sharp plunge and volatile bear market which usually last for six months or so. Also, avoid the margin loan, don’t try options (albeit TD Ameritrade ads “Think or Swim”), and don’t initiate short sales which loss is unlimited theoretically. Currently, I trade defensively only three short ETFs (DOG, SH, and PSQ which are the shorts of the DOW, the S&P 500, and QQQ, respectively).

As a short-term Trader, however, you must not jump into water without patiently testing the waves and temperature or for sharks. After running a long and tricky learning curve, you would start first with a pencil and paper, and then gradually increase the trading: My current betting cap (1% of my account balance), the frequency (as many as possible), and the threshold of a profit (+1% above the buy price) would be used.

Currently, I allocate anywhere between 30% to 40% (depending upon the market condition), but you probably should not exceed 5% of your total money as I did until 2020.

The Portfolio

A portfolio is not just a group of stocks and bonds, but a finance and theory-backed selection of equities and bonds which show negative correlations to each other historically. Some ETF portfolios are recommended. (I never offer any single stock).

My dozen core ETFs are:

· Vanguard Total Stock Market ETF (VTI)

· Schwab U.S. Broad Market ETF (SCHB)

· Vanguard Total Bond Market ETF (BND)

· Schwab U.S. Aggregate Bond ETF (SCHZ)

· Vanguard Short-Term Inflation-Protected Securities Index ETF (VTIP)

· Schwab U.S. TIPS ETF (SCHP)

· Vanguard Total International Stock ETF (VXUS)

· Schwab International Equity ETF (SCHF)

· Vanguard FTSE Emerging Markets ETF (VWO)

· Schwab International Small-Cap Equity ETF (SCHC)

· Vanguard Total International Bond ETF (BNDX)

· SPDR Bloomberg Barclays International Treasury Bond ETF (BWX)

(Note: Trading all ETFs and individual securities online are free in Charles Schwab and TD Ameritrade.)

For long-term (at least 5 years) investors, a dozen ETF templates are illustrated for your convenience:

· T.60:40 – VTI (60%) BND (40%)

· T.60:40 – VTI (50%) VXUS (10) BND (30%) VTIP (10%)

· T.60:40 – VTI (50%) VXUS (5) VWO (5%) BND (30%) VTIP (5%) BNDX (5%)

· T.50:50 – VTI (50%) BND (50%)

· T.50:50 – VTI (40%) VXUS (10) BND (40%) VTIP (10%)

T.50:50 – VTI (40%) VXUS (5) VWO (5%) BND (40%) VTIP (5%) BNDX (5%)

· S.60:40 – SCHB (60%) SCHZ (40%)

· S60.40 – SCHB (50%) SCHF (10%) SCHZ (30%) SCHP (10%)

S60.40 – SCHB (50%) SCHF (5%) SCHE (5%) SCHZ (30%) SCHP (5%) BWX (5%)

S.50:50 – SCHB (50%) SCHZ (50%)

·S50.50 – SCHB (40%) SCHF (10%) SCHZ (40%) SCHP (10%)

S50.50 – SCHB (40%) SCHF (5%) SCHE (5%) SCHZ (40%) SCHP (5%) BWX (5%)

Note: T: TD Ameritrade and S: Charles Schwab.

The Permanent Asset Allocation (‘PAA’) vs. Rebalancing (‘RB’)

I have advocated PAA for many years:

What are the relative merits of PAA (which is my preference), compared with Rebalancing (RB) (that is Vanguard and others’ advice)? Think very carefully as a long-term investor.

First, RB requires good timing, which must be challenging. Simply, we don’t know WHETHER one asset category (i.e., stocks) hits a top and maintains, (meaning the top one would go higher continuously), for a while OR NOT.

Second, and more important, comparing the current prices of two asset categories is possibly misleading. Because bond yields are much higher than dividends of stocks, and some portfolios are not even reinvesting dividends.

Third, PAA provides unintended Dollar Cost Averaging (DCA) which is an excellent systematic investment timing strategy. Younger investors can accumulate (or save) money with small amounts regularly for a long period. PAA gives them DCA as a byproduct, but RB doesn’t.

Forth, PAA is more tax-advantaged in most non-tax-deferred accounts (‘TDA’). Since the deferred taxes in TDAs such as IRAs must be paid eventually, a delicate tax plan is required for all accounts – taxable or tax deferred. The older (than 60) in particular should consider PAA rather than RB.