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A Case Study of A Beginning Investor


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One on the readers of my blog and a follower on social media reached out to me with a question about investing. I decided to share the discussion here to help others.

My follower: “I have a few stock options from my employer vesting… will leave most of it with employer, but would feel better diversifying a bit as well. Kind of gives me an excuse to start to tinker/learn some things about it all. Have a couple individual stocks in mind, but also looking at some Schwab ETFs… but when I try reading about them, my eyes gloss over and I fall asleep.”

A lot of employees with stock options will typically do one of two things. Either cash out the options, selling the stock and paying capital gains taxes, or take the options as more stock. Acquiring more shares of stock in the company you work for is not necessarily a bad thing, unless it’s your only investment holding. This person was wisely thinking maybe I should have more invested in something other that my employer’s stock.

My response: Are you looking for help?

My follower: “Would love some help… don’t really know what to think of the different EFT plans that Schwab has…”. (A common problem with any new investor is where to start). He then also said: "I could just buy into a few individual stocks like Microsoft… but, 🤷🏻‍♂️ .“

With thousands of ETFs and that many choices with individual stocks, picking a place to start can be very confusing.

So my next response was: “First you need to decide you risk tolerance level. ETFs spread the risk over dozens or perhaps hundreds of stocks. Something like Microsoft is excellent for growth potential and they now have a dividend, but you have to compare it to hundreds of other stocks to say which one is the best choice.”

The follower then defined his risk tolerance as: “For what I want to do right now, I would say a moderate risk is acceptable. Nothing stupid crazy/but not overly slow either.”

The next question is are you buying at the right price: “Then Microsoft is relatively safe. But is the current price reasonable? Right now it’s around $340 a share. But its intrinsic value is $225. Meaning it is overvalued.” (Learn more about how Microsoft is currently valued at Dividend Value Builder.)

And that’s the challenge with individual stocks, buying the right one at the right price. It’s a bit like going to the meat market, you want steak, but it’s really overpriced compared to hamburger.

My follower then said: “Work from home world might be driving them up a bit?”.

Applying a bit of logic as to why the shares are expensive, not a bad idea.

He then when on: “Picking the right buying price is always such a tough thing… There is a project management tool that I use at work for years that I love called asana. Last year they went public at 22, And I just noticed they’re trading at 130 something right now. And I’m so regretting I did not buy at 22…”.

I said: “Yes. But new stocks are very speculative.”

“Exactly why I hesitated:)” my follower said.

I then said: “I can find you a good Schwab ETF focused on technology or you could buy a non Schwab ETF via Schwab. Is Schwab your broker?”

“Would love that! Yes Schwab is who I have for my equity stocks…” he replied.

My suggestion was: “For Schwab I have always liked SCHD. All quality dividend stocks. Moderate price volatility and if you reinvest dividends, it keeps growing.”

He seemed to like this idea, as his reply was: “Yeah that would be perfect for me right now I think. Exactly where I’m at is trying to build the solid base from these option grants.”

I then added: “Now for growth I like QQQ. Ranked in the top 1% of growth funds. Tracks to the Nasdaq 100 index. So it’s only 100 or so stocks, but best performers on the Nasdaq, generally smaller companies than the Schwab fund (SCHD). But you get Apple, Microsoft, Amazon, Tesla, PayPal etc. Once you have a core portfolio of a few stable ETFs (maybe some in a bond fund like BND). Then you can buy those new issues that might go up or crash. The core portfolio protects you from losing your shirt on one stock.”

So maybe consider: “Does that help? 50% in SCHD and 40% in QQQ. 10% in BND. Should take care of creating a core portfolio of bonds for income, quality stocks with growing dividends and growth funds” I said.

He responded: “YES! Thank you!! 😊 Just to make sure I have this right, without just going to look on the Schwab site myself again… lol, SCHD, QQQ, BND, those are the acronyms for the fund names?”

My response: “Yes, trading symbols. So if you have $1000, $500 in SCHD, $400 in QQQ and $100 in BND. And then like a fine wine let it age for like five years. Or longer.”

Now he is all set with a core portfolio. Of course I could have suggested a two fund ETF of Vanguard Total Stock Market (VTI) and Vanguard Total Bond Market ETF (BND). That would provide very broad coverage of stocks and bonds for a core portfolio, but QQQ gave this guy the technology stocks he likes in an ETF that covers the top one percent of the stocks in the NSDAQ and a broader set of stocks with good dividends on the Schwab US Dividends Equity ETF (SCHD). And just for a bit of balance and income adding a bit in an income fund does that.

I still hope he reads my book, Five Paths To Wealth. It’s all in the book.

You can learn more about investing and managing your money to be more financial secure by reading Five Paths to Wealth. Read reviews at GoodReads.

Other books by Floyd Saunders include Family Financial Freedom and Figuring Out Wall Street.

You can learn more about him at his author web site.

Floyd spent his career working across the financial services industry. He is former banker, financial planner, tax preparer, insurance agent and information technology manager, working at Bank of America, JPMorgan Chase, H & R Block, Transamerica and Security Benefits. He also the founder of Really Simple Investing and the CEO of Saunders Learning Group.

Book cover design by Ashley Dameron


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