How To Start Investing Or Trading Or Both?

Sep. 19, 2022 5:21 PM ETBND, BNDX, BWX, SCHE, SCHF, SCHP, SCHZ, VTI, VTIP, VWO, VXUS, DOG, SH, PSQ17 Comments
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O. Young Kwon


  • The article is mainly to write a handy guide about how to start “Investing and Trading” for various investors.
  • The top-to-bottom is my base. A recession is likely not in the near future. The Terminal rate is 4.5%. A bull market (started on Mar. 09, 2009) is still with us.
  • As a long-term (5 years or longer) investor, you can start investing anytime.
  • The only matter is to select a minimum cost and the best quality investment products and the services of brokerages and mutual companies.
  • For long-term (at least 5 years) investors, a dozen ETF templates are illustrated for your convenience.

Wall street sign in New York with New York Stock Exchange background

naphtalina/iStock via Getty Images

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 cost) 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 portfolio-theory-backed selection of equities and bonds, which show negative correlations to each other historically. Some ETF portfolios are recommended. I never offer any individual 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.

Fourth, 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.

This article was written by

O. Young Kwon profile picture
O. Young Kwon, a NYU Ph.D. in Economics (1980), had worked in the security industry for ten years as a Registered Investment Adviser (RIA). He taught Macroeconomics (CUNY, Staten Island) and Statistics (Rutgers, Newark) during 1979 to1981. In the first half of 1980s, he, as a full-time Research Associate, researched at the Center for International Business Cycle Research (CIBCR) (with Geoffery H. Moore) on business cycles, growth cycles, international indicators, composite indexes, and forecast of business conditions and inflation. Prior to his academic career, he was an Economist/Bank Supervisor at the Bank of Korea (the Fed's counterpart) for ten years (1963 - 73). In 1971, he visited the Federal Reserve Bank of New York, sent by the Bank of Korea: He studied the long-run central banking in the computerized environment. He had been a conservative investor, targeting a reasonable investment goal (inflation plus 5%), by setting well-diversified portfolios with Vanguard and Charles Schwab Exchange-Traded (Mutual) Funds (ETF) in the long run (5 to 7 years) until 2020, as shown in my various 20 articles.In recent years, significantly increased market volatility induced mainly by the more frequent online trading pattern, however, forces investors towards somewhat aggressive trading to gain more or lose less. It is a very serious challenge to conservative investors like him. He has traded in very short terms, based primarily upon his (manual) real - time framework. It successfully provides him with the turning points in a given session. Now, he has invested in very-short terms (anywhere between a few seconds and a couple of sessions) in two trading accounts in Charles Schwab and TD Ameritrade (whit 40% of his nest egg).  He also has had two internet savings in Marcus: Goldman Sachs with (the remaining 60%), earning 1.7% of the annual percentage yield (APY) which is daily compounded and FDIC protected. (if you're an investor older than 70, my portfolio might be right for you in the current market condition). He studied at NYU under Oskar Morgenstern (Economic History, Game Theory), Wassily Leontief (Input-Output Theory), Fritz Machlup (International Finance and Trade), William J. Baumol (Economic Theory and Operations Analysis), M. Isaq Nadiri (Macroeconomic Theory), and Edward Wolff (Econometric Modelling). He worked on various research projects: The input-Output Framework of the U.S. Economy (Leontief), U.S. Productivity Measurements (Nadiri), Knowledge Distribution (Machlup), Firms, Games, Decisions (Baumol), and U.S. Household Spending and Saving Behavior (Wolff). His Doctoral Thesis under Machlup (1980): Theory of Foreign Exchange and Economic Policy.(UCONN MA in Economics 1975, Seoul Nat'l U BA in Economics 1963, Kyung-gi H 1958. Pohang M 1955, and Pohang E 1952 for His Dear Alumni & Friends)

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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