Proof of Concept

Before I started this blog I decided to make a few trades just to prove to myself I wasn’t missing anything obvious.

A few years ago I deposited $1,000 in a IRA as a proof of concept that provided invaluable experience.

The first thing I got out of the way is signing up for the account and realizing that the money takes time to transfer from your checking. Seems reasonable, but could be frustrating if you’re trying to make your first trade immediately.

The second thing I learned is the difference in order types. Instead of seeing a buy and sell button, there are a few options for each (market, limit, stop quote, ect.) I can now explain these, but it took some lite googling to understand them.

The third, and most important thing I learned is how to actually make a trade. Although I already understood this as a concept, it was important that I went through this process from end to end with a small amount of money. It would be unfortunate to mess up a large trade because I clicked the wrong button.

There is the argument that because trading fees are high, it is hard to make a profit on such a small amount. However, these early trades were not about profit, they were just about making sure I knew what I was getting into.

Experiencing the trading process from start to finish demystified it for me and gave me more confidence down the line. Now if I see an opportunity I know exactly where to log in, how much time it will take my money to clear, and which order type I should choose. Because I started with a proof of concept, I can focus on the trade knowing that I won’t experience any technical difficulties.

Why You Are Not Qualified To Make That Trade

“90 % of day traders fail”

“You really think you can beat the big banks?”

“If it was that easy everyone would do it”

We have all heard some variation of “You are not qualified to make that trade”. It almost seems like the only people who are qualified are some variation of Ivy League graduates and mathematicians.

I don’t buy it, but even if I did my goal is not to make trades and succeed every day, it’s just to outperform the market over the span of a year, which is much, much easier.

Lets make some assumptions:

  • The average yearly return of the stock market is ~7%
  • I have money that I can lose without becoming homeless.
  • I also have money in my 401k.
  • The money I am using for trading would most likely sit in a 401k or a checking account anyways.

These assumptions are all crucial for trading as a young adult and are the basic tenants of personal finance for people of any age. Now Let’s break these down one by one.

The average yearly return on the stock market is ~7%

This is one of those sayings that is so common most just accept it as truth — but is there any data to support this? Yes, there is and this link does just that.

For those of you too lazy to click the link, it basically says if you control for price, dividends, and inflation, the returns between 1950 and 2009 are almost 7% exactly. It is important to know this number because chances are, if we just put our money in a index fund, we can get 7% with no work whatsoever.That means this 7% is the number to beat.

I have money I can use without becoming homeless

I would not even think about putting in the market that I cannot afford to lose. Personal finance 101 will tell you to have an emergency fund set aside. This should not be part of that emergency fund.

I also have money in my 401k

Even after I had an emergency fund put together, I also put money in my 401k. For me, this was beneficial since my employer has a matching program and I would be a fool not to take advantage of this.

The money I am using for trading would most likely sit in a 401k or a checking account anyways. 

Now that my emergency fund and future is adequately funded, I finally am able to assume some risk. I’m finally ready to jump into the markets knowing that no matter what happens, I’m going to be okay.

With all those assumptions aside I now get to the main point of my trading thesis — I just need to outperform the market. 

Seriously — the target is 7%. I’m not on a trading floor that expects me to generate consistent returns with weekly evaluations. I don’t have a boss that will fire me if I don’t hit 20%, and honestly none of this matters because of the money I have set aside.

I believe most traders fail because they are greedy and look for returns way out of their reach. I also think many traders fail because they have to meet quotas set by their bosses or a need to feed themselves.

A Main Street Warrior doesn’t have to worry about any of that.  This may be one of the largest advantages of trading to supplement your income — you can wait for good trades to come along and only take good trades.

Am I less qualified than the Harvard graduate who is sitting at Goldman Sachs? Probably, but I don’t need to show the returns he does, I just need to beat the 7%.

 

What does ‘Main Street’ mean

Main street is a colloquial term used to refer to individual investors, employees and the overall economy. “Main Street” is typically contrasted with “Wall Street.” The latter refers to the financial markets, major financial institutions and big corporations, as well as the high-level employees, managers and executives of those firms. You’ll often hear about Main Street vs. Wall Street in rhetoric about the differing goals, knowledge levels, interests and political power of these two groups. Some people think that what’s good for one group is bad for the other. For example, high executive pay is seen to conflict with ordinary workers’ pay and job security.

Read more: Main Street Definition | Investopedia http://www.investopedia.com/terms/m/mainstreet.asp#ixzz4HMYVz8sx
Follow us: Investopedia on Facebook

A Main Street Journey

My name is Jacob. I am a 24 year old who lives in Santa Cruz, California and has spent the last 3 years working as a Financial Analyst at a tech company.

While my experience is in corporate finance(which has nothing to do with investing), I plan to start trading in my free time.

The plan is not a get rich quick scheme —  the plan is to make sound trades to supplement my income.

I hope to show that someone with no industry connections, no financial backers, a full-time job, and an average salary can succeed in the market.