Author: admin

The Journey to Understanding Trading as a Mental Game

Trading is often perceived as a numbers game, driven by graphs, statistics, and market trends. However, many traders, at some point in their journey, realize the vital role of mental prowess in this field. This recognition typically transforms their trading strategies and results.

The Initial Perception of Trading

When new traders enter the market, the primary focus tends to be on acquiring technical and analytical skills. Learning to read charts, understanding market indicators, and staying updated with market news are commonly prioritized. Many assume that mastering these skills is sufficient for success in trading. However, this assumption often leads to unanticipated challenges and learning opportunities.

Indeed, the steep learning curve required to become adept at reading charts and indicators can consume a significant amount of time. New traders might invest hours each day, delving into complex candlestick patterns or understanding the subtleties of moving averages and relative strength indexes. As arduous as this may be, such diligence is deemed necessary to attain a solid foundation in trading.

Moreover, staying abreast of financial news and global events is crucial, given how geopolitical tensions and economic policy shifts can sway market directions. This dedication sometimes borders on obsession, as traders may find themselves persistently monitoring financial news, attempting to connect the dots between world events and potential market reactions.

The Reality of Emotional Influence

Despite these skills, numerous traders experience unforeseen losses, leading to frustration. This is when the realization dawns that the psychological aspect of trading significantly impacts decision-making. Emotions such as fear, greed, and overconfidence can cloud judgment, leading to detrimental trading errors.

For instance, during volatile market conditions, fear can induce panic selling, causing traders to exit positions prematurely and miss potential recoveries. Conversely, greed can propel traders to hold onto positions longer than advisable, hoping for increased profits, only to witness market reversals that erode gains. Overconfidence, too, is perilous, often manifesting after a few successful trades. Traders might then disregard their trading plans or neglect risk management protocols, falsely assuming their abilities can override market unpredictability.

Importance of Psychological Resilience

Developing a strong mental framework is crucial for maintaining consistency in trading. Traders need to cultivate resilience to handle losses and avoid impulsive decisions. Studies have shown that disciplined traders, who manage their emotions effectively, tend to exhibit better performance over time.

Psychological resilience is not simply about suppressing emotions. Instead, it’s about acknowledging them and understanding their roots, which aids in minimizing their negative impact. For example, a trader who documents their feelings about each trade in a journal may recognize recurring emotions tied to specific trading scenarios. This awareness allows them to prepare coping strategies, such as taking breaks during emotional trading days or setting predefined rules for exiting trades.

Adopting a New Approach

Once the mental game aspect is acknowledged, many traders begin to integrate psychological strategies into their routines. Techniques such as mindfulness meditation, setting clear goals, and maintaining a trading journal help in fostering a disciplined mindset.

Mindfulness meditation can be particularly effective in reducing stress and improving focus. By dedicating a few minutes daily to mindfulness, traders can cultivate a heightened awareness of their thoughts and emotions, thereby reducing impulsivity and reactivity. Additionally, setting clear, realistic goals provides direction and motivation, ensuring traders remain aligned with their long-term objectives rather than becoming swayed by short-term market fluctuations.

The practice of maintaining a trading journal also supports emotional management. Recording trades, alongside the thought processes and emotions experienced during those trades, facilitates reflection and self-assessment. Over time, this practice reveals patterns and insights, allowing traders to make informed adjustments to both their psychological and technical strategies.

For those seeking more information on integrating psychology into trading strategies, resources are available here.

Conclusion

Understanding that trading is as much a mental game as it is a technical challenge can be a turning point for traders. By focusing on developing both analytical skills and psychological resilience, traders can enhance their decision-making processes and, consequently, their trading outcomes. The journey to mastering the psychological element of trading is ongoing, yet it is an investment that pays dividends through improved trading consistency and personal growth. As traders continue to explore the mental facets of trading, they uncover new depths of self-awareness and strategic acumen, laying the groundwork for long-term success in the ever-changing world of markets.

Introduction

In the dynamic world of trading, market fluctuations can significantly affect financial portfolios. This article delves into a particular incident where a trader lost half of their trading account in a single day. By exploring the underlying reasons for this dramatic loss, we aim to offer insights that may help in preventing similar occurrences in the future.

Background on the Trading Strategy

The trading account in question primarily employed day trading tactics, specifically targeting stocks in the technology sector. Day trading typically involves executing a large number of trades within the same market day to exploit small price fluctuations. This strategy often employs high-frequency trades coupled with leveraged positions, aiming to capitalize on minimal price movements for substantial gains. However, while such a strategy has the potential for significant returns, it also inherently carries heightened levels of risk.

Day trading is not merely about timing the market, but also about making precise and well-informed decisions under pressure. This approach requires a trader to stay constantly alert, closely monitoring news that could impact stock prices, particularly in sectors as volatile as technology. The aggressive nature of this high-paced trading style often leaves little room for error, emphasizing the importance of having a solid risk management plan in place.

Market Volatility

Among the primary contributors to the loss experienced was an unforeseen surge in market volatility. Market sentiment can shift rapidly, often due to economic announcements or geopolitical events that significantly affect stock prices. In the incident being discussed, the market experienced a swift change in sentiment following a negative news release about international trade relations. This triggered a rapid sell-off in technology stocks, which the account heavily depended on.

Fluctuations of this nature are not uncommon; however, they can be particularly damaging if a portfolio is not adequately diversified or prepared for such movements. Traders must acknowledge that with high reward often comes high risk, and volatility is a defining characteristic of the stock market that can either be an ally or an adversary.

Leverage and Margin Calls

A significant factor amplifying the impact of market volatility was the account’s use of leverage. Leverage involves borrowing funds to boost one’s trading position, which can intensify both gains and losses. This particular trading account was highly leveraged, leading to an enhanced reaction to the downturn in the tech sector.

As the stock prices started to plummet, leveraged positions triggered margin calls. A margin call occurs when the value of a trader’s account falls below a broker’s required amount, prompting the trader to either deposit more funds or liquidate positions to cover potential losses. In this scenario, the trader lacked sufficient capital to address the margin calls, leading to the forced liquidation of their positions and exacerbating the financial losses.

Risk Management and Planning

One of the critical shortcomings of this trading endeavor was a lack of comprehensive risk management strategy. Effective risk management is pivotal to trading success and involves measures such as setting stop-loss orders proactively. A stop-loss order directs the sale of a security when it hits a predetermined price, thus acting as a safeguard against significant losses.

Failure to employ these protective measures left the account exposed during rapid price declines. Moreover, diversification in the portfolio and reducing the size of trading positions could have reduced the extent of the losses. By using strategic planning and risk management techniques, traders can position themselves to better withstand sudden market declines.

Psychological Factors

The psychological dimension of trading can substantially influence decision-making processes. Emotional responses such as fear and panic during turbulent market conditions can lead to impulsive choices and a deviation from planned strategies. In the described incident, these emotions led to rash decisions that did not align with the trader’s original plan.

Managing psychological factors is essential for maintaining rationality and discipline during market volatility. This involves recognizing emotional triggers and developing methods to keep them in check, thereby enabling adherence to strategic plans despite external pressures.

Lessons Learned

The incident offers several critical lessons, beginning with acknowledging and accepting the risks associated with high-leverage trading practices. Establishing a robust risk management plan, incorporating stop-loss limits, and ensuring diversification of holdings are all vital strategies to buffer against severe financial setbacks. Another key lesson is the importance of maintaining emotional discipline and sticking to implemented strategies, which are crucial for minimizing the detrimental effects of market volatility.

Conclusion

Experiencing a loss of this magnitude serves as a stark reminder of the inherent risks involved in trading, especially when positions include high leverage. By reflecting on this experience, traders have the opportunity to integrate more effective risk management strategies, thereby better preparing themselves for future market fluctuations. Continued education, along with regular reassessment and adjustment of trading approaches, can aid in achieving more sustainable and less volatile trading outcomes. The lessons gleaned from such experiences should serve to encourage a more informed and cautious approach to day trading, ultimately fostering a more resilient financial strategy.

The Unexpected Turn in Trading

The world of trading is often unpredictable, filled with moments that can lead one to reevaluate their strategies. Recently, I experienced a trade that forced me to question the very foundation of my approach. This event serves as a crucial reminder of the volatility and complexity inherent in financial markets.

Initial Analysis and Strategy

At the outset, my strategy was rooted in fundamental analysis. I relied heavily on economic indicators and financial statements, trusting these elements to provide a clear picture of a company’s potential. The stock in question appeared promising based on strong quarterly earnings and market trends favoring its industry. My decision to invest was also supported by positive analyst reports and a history of steady growth.

My analysis started with a deep dive into the company’s financial health, encompassing income statements, balance sheets, and cash flow statements. These documents painted a picture of robust financial stability, which, combined with favorable market conditions, reinforced my confidence in the investment. Analysts were optimistic, projecting sustained growth driven by the company’s capacity to innovate and capture market share in a burgeoning sector.

The Trade Execution

After meticulous planning, I executed the trade with confidence. Employing a combination of options and shares, I aimed to maximize potential returns while managing risk. Initially, the stock’s movement aligned with my expectations, showing positive signs in line with my research.

My strategy was multifaceted, combining both equity investments and derivative products to hedge against potential downturns effectively. The methodology was designed to capitalize on market upsides while limiting losses through protective options. Once executed, the initial phase of the trade remained promising. Market trends were supportive, and the stock displayed upward momentum as anticipated.

The Unforeseen Event

However, a sudden and unexpected market event—a geopolitical incident—caused significant market volatility. Despite my thorough analysis, this was a factor beyond the scope of my prepared strategy. The stock price plummeted, and my position quickly turned from a hopeful gain into a substantial loss.

This unforeseen geopolitical event was significant, impacting not only the specific stock but broader market sentiment. Such incidents are unpredictable by nature, underscoring the limitations of even the most well-researched strategies. The event introduced a level of market turbulence that was simply not factored into my original analysis—a stark reminder of market sensitivities to global events.

Reevaluation of Strategy

Reflection and Learning

This experience highlighted the limitations of relying solely on fundamental analysis. It underscored the importance of incorporating other strategies such as technical analysis and maintaining a diversified portfolio to mitigate unforeseen risks. Furthermore, it emphasized the necessity of having a contingency plan and honing quick decision-making skills.

Fundamental analysis, while crucial, does not encompass all risks—particularly those that are external and unpredictable. Thus, diversifying investment strategies becomes vital. By embracing technical analysis, traders can gain insights into stock trends and potential price movements through tools such as moving averages and momentum indicators. This dual approach can potentially offer a hedge against unexpected market shifts.

Additionally, building a contingency plan involves identifying thresholds for risk tolerance and devising exit strategies should a trade deviate from its expected course. This involves quick reassessments and decision-making agility, ensuring that responses are carefully calculated rather than reactionary.

Adapting to Market Conditions

Adapting strategies to the ever-changing market environment is crucial for long-term success. As part of my reevaluation, I am now considering a more comprehensive approach to trading, integrating elements like trend analysis and volatility metrics.

By employing a more comprehensive strategy, one can respond more dynamically to market changes. Trend analysis, for instance, can help in gauging long-term directionality in stock movements, while volatility metrics, such as the Average True Range (ATR), provide valuable insights into market fluctuations, allowing for more informed risk management decisions.

Diversification extends beyond individual trades and should incorporate a varied asset allocation across different sectors and markets. This strategy not only spreads risk but can also enhance returns by engaging with differently correlated assets.

Conclusion

While the trade in question was a setback, it provided invaluable insights. It reaffirmed the unpredictable nature of trading and the importance of being adaptable. For those looking to refine their trading strategies, this experience serves as a reminder to continuously learn and adjust to market conditions. The lessons learned will undoubtedly shape my future trading endeavors, promoting a more resilient and informed approach.

In summary, the unpredictable aspect of trading demands constant vigilance and adaptation. By integrating multiple analysis methodologies and ensuring diversified investments, traders can better navigate the complexities of the market. Continual learning and adaptation are essential components in developing a robust trading strategy capable of withstanding the unforeseen challenges that arise in the financial world. Such preparedness not only mitigates potential losses but also maximizes opportunities for sustained success over the long term.

While binary options might seem appealing due to their simplicity and potential for quick profits, the high risk, prevalence of fraud, limited regulation, and lack of transparency make them a precarious choice for most traders. Exploring other trading opportunities is recommended for those looking to grow their financial portfolios.

Regulatory issues

Many of the regulatory bodies worldwide that are considered top-level when it comes to trader protection have banned brokers from offering binary options to non-professional traders. This means that non-professional traders who wish to do binary options trading are forced to seek out brokers regulated by lower-tier regulators (not famous for having strict trader protection in place) or non-regulated brokers. If you do this, you increase your risk of running into unethical brokers and fraudulent schemes.

It should be noted that in many jurisdictions, e.g. Australia, it is not illegal for a non-professional trader to engage in binary options trading. However, you place yourself in a risky situation by doing so. Brokers are not allowed to offer binary options to traders in Australia, so you will either go with a broker that is willfully breaking the law (and might be willing to break other laws as well) or you are signing up with a broker outside Australia that is either non-regulated or regulated by a less strict regulator. If you are scammed or run into other issues with the broker, the Australian legal system will most likely find it difficult to do much about it if the broker is located abroad in a laissez faire country. When you turn to the license giver in that country to file a complaint against your broker, you might find out exactly why this license giver is so popular among brokers who want a lot of freedom and flexibility in their dealings with non-professional clients.

Of course, there are examples of serious and reputable brokers who are regulated in one of the more flexible countries or states, but the risk of ending up with one of the bad apples increases when you chose to take this route.

Potential for fraud

The binary options market has been plagued by scams and fraudulent platforms. Many unregulated brokers operate without oversight, leading to deceptive practices and significant financial losses for traders. These scams often involve brokers manipulating prices, refusing to credit customer accounts, or not processing withdrawals. Identity theft and credit card scams are also a risk.

Lack of transparency

Binary options trading can lack transparency, with some brokers manipulating prices or offering unclear terms and conditions. This makes it difficult for traders to understand the true risks and potential outcomes of their trades. Additionally, some platforms may not provide adequate information on fees, payout structures, or the mechanics of the trade, leading to uninformed trading decisions.

High risk and volatility

Binary options are highly speculative financial instruments. The all-or-nothing nature of these trades means that if your prediction about the asset’s price movement is incorrect, you will lose your entire investment. The short-term nature of binary options, often with expiries ranging from a few minutes to a few hours, adds to their volatility and risk.

If you buy shares in a company and the share price falls, you can normally sell and recouperate at least a bit of your initial investment. You can even use a stop loss order that will automatically put your shares on the market if the price drops to a certain point. With shares, you also have the option to wait out the situation, hoping that the share price will rise again. With binary options, none of these choices are available. With the classic binary option, you either get paid in full or lose the entire investment when the option expires.

Addiction risk

The fast-paced nature of binary options trading can lead to addictive behavior. The opportunity for quick gains can tempt traders into a cycle of compulsive trading, constantly chasing losses or trying to capitalize on short-term price movements. This can result in significant financial and emotional distress, as traders may engage in risky behaviors in an attempt to recover losses. This is not unique to binary options – it is a risk that you need to be aware of concerning all types of fast-paced trading.

Better alternatives

Considering the high risks and potential for fraud, traders may want to explore other, more secure investment options. Stocks, bonds, mutual funds, and ETFs are examples of well-regulated instruments that you can utilize in jurisdictions that offer sound investor protection. Additionally, these investments typically have lower risk profiles and more transparency than binary options, making them safer choices for most traders.

If you are a non-professional trader that like the fact that binary options can be customized when it comes to time-frame, investment amount and market direction, you might want to take a look at Contracts for Difference (CFDs). The CFD has these characteristics but you will have no problem finding serious authorities and license givers around the world that have not banned brokers from offering CFDs to non-professional traders. CFDs make it easy to speculate on both rising and falling prices (just like with binary options) and you never have to own the underlying asset (just like with binary options). Some of the concerns regarding binary options are present with CFDs too, e.g. the possibility to find very short-term contracts.

Note: Most brokers that offer CFDs also offer leverage, but it is very important to remember that using leverage increases the potential for both gains and losses.

This morning I started to think about what my number one overlooked tips to beginner investors would be. Something I wish that some one would have told me when I first got started. Something that can make it easier to make money on your first investments.

There is a lot of things I wish I had known when I first started investing but I think my number one overlooked tips to beginner investors would be this. Take your time and make sure that you chose the right stock broker for you. A stock broker that makes it cheap to trade with stocks.

Most people do not understand how important it is to choose the right trading platform. This is particularly true when you are a beginner and trade for small amounts. Choosing the right broker makes it a lot easier to make money and to get excited about investing in stocks. Choosing the wrong broker makes it a lot harder to see quick results and make it a lot harder to stay motivated to invest money in the stock market every month. I think choosing the wrong broker is a contributing factor to that so many fail to stay motivated to save money each month and that the fail to build up a nice little nest egg for themselves.

It might seem like all stock brokers offer roughly the same service and roughly the same prices. But this is not true and it is worth taking you time to choose the right one. Below I am going to tell you how to do just that.

What to look for in a good broker

If you ask 10 different traders about what makes a good broker you are going to get 10 different answers. The answers will however have a lot in common. Common mention qualities that you need to look for in a good broker would include:

• A good interface: The broker needs to have a well designed interface that makes is easy to navigate the website and to buy and sell stock.
• Mobile trading: The broker needs to have a good trading for mobile trading.
• A wide selection of stock: The broker should offer trading on a large number of different stock markets. The more the better. The broker must offer trading on the major US and European stock markets.
• Tools: Give the trader access to good tools that helps them analyze stocks and make better trades.
• Offer trade with other financial instruments: The broker should offer as many other financial instruments as possible. This might include options, warrants, swaps and bonds.
• Prices: A broker should be cheap to use.
• Good customer service: The broker should offer a good friendly customer service
• Offering credit: A good broker should allow you to use your stocks as security to borrow money.
• Easy to deposit and withdraw money: it is important that it is easy to add and withdraw money from your account.

I agree with most of these qualities. A good broker needs to be easy to use and make it easy to get help. I do however not agree that a good broker should be offering tools that help you make money or a lot of other financial instruments. Most traders do not need the tools. For the broker to offer them is to sponsor the small amount that need them at the cost of all other traders. I do not think that brokers should offer trading with other types of financial instruments because they are never as good at it as other specialized brokers are.

In my opinion you should focus on one single quality when you are looking for your first broker. The price. The price is the quality that will have the biggest impact on your earnings potential when you first start trading. Ideally you should chose a broker that allows you to trade for free.

Why price matters

Every cent you have to spend to trade can have a big effect on your bottom line when you are trading for small amount. This is because the fees you pay eats into your potential profit.

Most brokers have a trading fee that has a minimum cost per trade. If your trades are small enough that you have to pay the minimum fee than you will pay a relatively larger fee than those who trade for more money will pay.

Lets look at an example. Broker A charges 0.3% trading fee, $9.99 minimum. You will have to pay more than 0.3% fee if you want to purchase stock for less then 3300. Lets pretend that you save $500 every month that you want to invest in stock. You usually divide this money between two stock. This means that each transaction will be worth $250 and you will have to pay the minimum fee of 9.99. That doesn’t sound too bad does it. Well it is. 9.99 means that you pay a 4% trading fee. You have lost 4% the second you purchased the stock. You are going to need to pay another 9.99 if you want to sell the stock. This means that the stock has to go up by 8% for you to break even. This is insane and make it a lot harder to earn money. The fees might eat up your profit for the entire first year.

You are a lot better of choosing a broker that allow you to trade for free when you are trading for small amounts. If you can not find a free stock broker then you should chose on with as low a minimum fee as possible. You can find free brokers in most mature market.

By choosing a cheap, or preferable free. Stock broker you will be maximizing your chances of success when you first start trading with stocks. It is likely that you are going to want to switch to another broker when you get more experiences and start trading for larger sums of money. But a cheap broker is the best choice for you when you first get started.

You can easily move your stocks to another broker if you are unhappy with the first one. Most brokers will move your stock to be managed by them completely free of charge.

I own a small number shares of Tesla as a part of my high risk portfolio. Buying this stock has so far been a very good investment. I am currently debating whether it would be best to sell the stock or if I should buy more. There is no doubt that Tesla is very overvalued if we look at their current production but if it can meet its production goals it might be able to keep the hype train going and increase in value even further.

More debt

Tesla is currently raising more money through a bond offering. Tesla has earlier issued new stock to raise more capital but Elon Musk wants to avoid to further dilute the company and will therefore borrow money instead of issuing new stock. This increases the risk associated with this stock and might give some investors cold feet. The money raised through the bonds will have to be paid back with interest and will effect the companies bottom line. This has not been the case when they issued new stock.

The fact that Musk prefers to borrow the money rather than issue new stock can however also be seen as a signal of strength. Musk might feel certain that he will met production goals and that Tesla will be able to start earning a profit in the coming future. If this is the case than he might choose not dilute the stock because he know he isn’t going to need to.

The new debt will be added on top of all the debt Tesla assumed when the purchased Solar city.

New Model

Production has now started on the new mass market model of Tesla. The interest for this car has been huge and Tesla received almost 100 000 pre-orders. They are also receiving almost 2000 new orders per week. This is very impressive for a car that is still produced in very small numbers and where customers will have to wait for another year to get their cars. Some of the original orders where made several years ago despite the fact that production never was meant to start before now.

The large interest for the car is a large opportunity for the company. Musk have said that they can sell as many as they want to. But it also means a large challenge as the company needs to be able to ramp up production from the small production numbers they currently have to more than 10 000 cars a week. If they are able to do this then a lot of nay sayers would be converted and the stock might continue to rise. But Tesla would still be overvalued as they would still be producing and selling less car that other companies with similar valuations such as Ford and GM. This might however not matter as long as Tesla can show that they can continue to grow quickly.

Personally I think that we will have to wait atleast 5 more years before Tesla can be a real player  that is able to sell similar numbers to the big giants. I have high hopes for the electric truck that they are developing. I think that can be very profitable and get adopted by the market very quickly if they can make it an attractive alternative for the transportation companies.

Solar city and the Mega factory

Musk have received a lot of critic for merging Solar city into to Tesla to form a complete energy company. I do think that parts of this make sense but I do not know if I believe in solar citys business idea. However, solar city gives him a good outlet to sell the wall battery packs and the solar tiles. Both these products have the chance of becoming huge hits but might be hampered by the high price. Teslas reputation and design might however make people willing to overlook this. I do not think the purchase of solar city will make or break Tesla. The fate of Tesla will decide the face of solar city. Not the other way around.

I personally think that decision to buy solar city might have been made because Musk was getting tired if short sellers that was forcing down the stock value of solar city. Musk owned a large stake in solar city. He saw a good opportunity to acquire the company and punished the short seller at the same time and he took it. Now he has control over the future of the company and does not have to worry that short sellers are going to bring the company down. Tesla does of course also attract a lot of short sellers but the Tesla stock have proved to be more resilient to this.

The Mega factory is likely a very good idea as it will help with the car production and making the cars more profitable. I think he should be looking into starting construction on a second factory as soon as possible. Possible in Europe.

The Australia deal and the opportunities it create

Musk recently landed a very large deal when he offered to solve the energy storage problem in a part of Australia in 100 days by building a 129MWh battery or the equipment would be free. It took some time before the government was able to approve the deal. The deal is now approved an construction is underway. This is a big risk. Tesla will earn a nice profit on the construction if they finish in time but will face loses of about 50 000 000 if they do not. I have no doubt the company will build the battery in time. They recently built a 80MWh grid-scale battery in southern California. They completed this battery in 90 days. The Australian deal have given the company a lot of good press and might lead to further contracts in the future if they are successful. I think that grid-scale batteries can become on of Teslas most important and most profitable businesses in the coming years. The demand is huge and will only grow as renewable energy become more popular.

The cars is great for attention and awareness but I think it is in the industrial space, trucks, grid-scale batteries etc that Tesla will end up make most of its money and the larges impact on our society.

Conclusion

I think Tesla is grossly overvalued if you look at the company as an automobile company. The company is already worth more than it should be even if it meets its ambitious production goals. If Tesla only sold cars I would definitely sell my stock.

But Tesla is much more than just a car company and the most valuable asset the company have in my eyes is the often overlooked division for grid-scale batteries. These batteries have large profit margins and Tesla is positioned to take a large part of this business in Australia, the US and Europe. This to me is a lot more exciting than the cars and might grow a lot quicker than the car production can. I genuinely believe that this can be an extremely profitable division for Tesla. I am excited enough about these possibilities to keep the stocks I have. I do not think I will be buying any more stocks at this moment but I will be closely following the news about grid-scale battery sales and might pick up more stock if that business seems to be growing as I think it is going to. I might also pick up more stocks if the stock price goes down about 10% from current levels.

Solar city and solar tiles seems like a less important part of the business right now and does not figure in to my conclusion. But they have the potential to help the bottom line of the company in the future.

I invest a very large part of my money in dividend stock. About 85% of my money is in my main portfolio that is filled exclusively with dividend stocks. In this article I am going to explain why I chose to invest in dividend stocks. Why I find them to be the best long term investments there is.

But first: Lets look at what I dividend stock really is. A dividend stock is the stock in a company that pay a dividend. A dividend is a cash payout to the owners of the company. Each share owner gets paid a part of the dividend based on how many shares he or she owns. The more shares he or she owns the more money he or she will get. All owners of the same type of share will get the same per share dividend. A company might have several different type of stock. Different types of stock can get paid different dividends. Some stocks might not give you a right to any dividends at all while other stocks might give you the right to an extra high dividend.

Companies does not have to pay a dividend. It is up to the board and the participants of the yearly stockholder meeting to decide the dividend. In reality the dividend is set by the board. It is very rare for the stockholder meeting to object to the dividend. The dividend is almost always approved.

When I and other investors say that we invest in dividend stock than we are usually referring to companies that have a history of giving the share holders large dividends. Companies that keeps increasing their dividends year after year. Theses stocks are sometimes referred to as dividend kings.

Different investors look for companies that offer different dividend payments. I personally try to invest in companies that offer 4% or better although I might sometimes accept 3% if I really believe in the company.

What makes dividend stocks good investments

Not all dividend stocks are good investments. They can be good or bad investments just like any other type of stocks. You need to do you research before you buy a dividend stock. Some dividend stocks can be money traps that can drag investors with them in their fall. It is very important to make sure to not get trapped in a dividend stock that is doing poorly. A company that is doing poorly but keep paying high dividends is a huge red flag as it indicates that the management doesn’t know who to fix the problems. They use money to pay dividends instead of fixing the problems in the company.

With this said. Dividend stocks tend to be larger more mature companies. Companies that do not need all their money to keep growing. Dividend stocks tend to be lower risk investment than other stocks. Lower risk does however not mean “no risk” and you need to be picky when you decide which stocks to buy.

If you choose the right dividend stocks then they will give you a good return on your money year out and year in.

The benefits of dividend stocks for the long term investor

Dividend stocks provide me and other long term investors with a number of different benefits that other types of stock can not. All these benefits are tied to the dividend. Tied to the fact that you do not need to sell your stock to get money from your stock. This allows you to build a portfolio that can give you a comfortable life indefinitely once you have decided to retire since you do not have to sell the stocks to pay your bills. You can use the dividends to do this. The portfolio will provide for you for ever. You do not need to worry to run out of money as long as you live within the means of your dividends.

Another big benefit with dividend stocks if you are a long term investors is that you are less exposed to stock market crashes. In most cases you will still get good dividends during the crash. This gives you an excellent opportunity to buy more stocks at a cheap price and you are not forced to sell stock at a low price.

A lot of people are asking me to share how I am able to save more than 50% of my paycheck each month and still live a good life. I will try to answer this question below and tell you how you to can save a lot of money to.

The first thing to consider is that I earn a rather good income. I earn about $6000 a month (pre-tax). This makes it easier to save a large percentage of my paycheck. But I have not always had a good income and I was able to save 30% of my income back when I earned about half of what I am earning now. The bottom line is that it is almost always possible to reduce your expenses and save a part of your pay check.

Before we look at how I save money I want to stress how important it is to not only look at how you can reduce your expenses. You should always be looking for ways to increase your wage as well. Is there any class or certification you can take to make you worth more to your employer. Is there any side hustle that you can use to earn extra money on the side.

Question everything

We all grew up in a society where we are thought that you need to have certain things. Things that you can not live without. Things that every working person should own. But do you really enjoy having these things. I personally find that a lot of these things are not worth the price they cost. That to me they are not essentials but rather unnecessary expenses. You should therefore consider all your expenses and see if they are really necessary.

Which things you have been thought that you cant live without might vary depending in where you grew up. If you are raised in certain parts of the country then you might have been thought that you can’t live without a car, the news paper or Sunday dinner at a restaurant. In other parts of the country the essentials might have been a phone line, cable tv and magazine subscriptions. The truth is that none of these things are really necessary to all. If you really ask yourself what you need and what you might be bale to give up without negative effects on your life then you might be surprised over how much you can live without. I know I was and I was able to eliminate a number of monthly bills.

It does not matter what other thinks. Do not pay for anything that does not bring you a better life.

Sometimes it can be better to switch to a more expensive alternative than the one you are currently uses if that brings you more fulfillment per dollar spent. Your goal should not be to minimize your expenses. That might give you a boring life. Your goal should be to maximize what you get from your money.

Things I no longer spend money on

Below you can see some examples of the things I no longer spend any money on. Things that you might also be able to stop paying for.

• Cable TV: I no longer pay for TV. I know I am far from the only one who have chose to take this step. You can find all the entertainment you need online and you can save a lot of money each year by cutting your cable.
• Netflix: I no longer use Netflix either. I find that TV tends to steal too much time since I watch things I do not really like. I therefor try to see the films I really like in the movie theater and buy the shows I want to see on DVD. This does not cost me any more than TV used to do and I end up watching only the things I really want to see.
• Magazines: I used to subscribe to a number of different magazines that I hardly ever read anymore. I realized that I was able to read everything I want to read online and cancel almost all subscriptions. I still get one magazine that I read religiously.
• Newspaper: I no longer get any news paper. Not even a local one. There is no need to. Local blogs tends to report better than local papers on local matters. National and international news are easily available online.
• Landline: I do not need a phone line in my house when I got my cell phone.
• New cellphones: I do not buy new cellphones before me old one breaks. The new functions you get with a new phone is not worth the often very high price.
• Coffee in coffee shops: I do not go to star bucks or other coffee shops any more. The coffee in these shops are not as good as the coffee you can brew yourself with a quality roast. Going out to start bucks regularly is very expensive. It is very easy to spend $100 a month at star bucks without thinking about since each coffee only cost a couple of bucks. I was surprised what a large difference this made.
• Lunch: I no longer eat lunch in restaurants. Instead I prepare and bring my own lunch to work. This allows me to eat healthier, cheaper and better tasting food every day. A number of my colleges have started doing the same thing and we are now able to eat without stress during our lunch hour since we no longer have to rush out.
• Snacks: I no longer eat snacks, candy or chips very often. This have allowed me to save a lot of money. A small candy bar each day quickly adds up to a lot of money. I also realized that I used to eat a lot of snacks that I didn’t really like. I was just eating them out of habit. Once I realized that it was easy to break the habitat. Now I make sure to only eat snacks I really like when I do eat chips.
• Alcohol: I used to get way too drunk when I went out. I drank a lot of alcohol and cared more about getting drunk than I did about what I was drinking. I have come to realize that I can have a lot more fun while saving money by drinking less. I still drink, but I do not get completely hammered. An added benefit of drinking less is that you can choose to treat yourself to drinks you really like even if they are a little more expensive. I have completely stopped drinking when I am at home. I only drink at social gatherings where alcohol is prevalent.
• Credit cards and consumer credit: I no longer use these types of credits. I never buy anything I can not afford.

Things I spend less on

Below you read a little about things I spend less on.

• Insurance: Most people can save a lot of money by looking over their insurance and finding a cheaper provider. You need to make sure that you do not pay more than you need for the protection you need and that you do not pay for more protection then you need. I recommend that you look over your insurance once a year to make sure that it is always suited for your current situation.
• Internet and cellphone service: There is a lot of money to be saved by regularly reviewing and renegotiating your cellphone and internet service. I always set a calendar alert for when my contract is up.  I then move my business to where ever i get the best deal. Make sure you do not get tricked into paying for a service that is more than you need. Most people do. Paying for more than you need is a waste of money.

A large part of my modest success as an investor can be attributed to my frugal life style. I try to eliminate all unnecessary costs without reducing my quality of life. By eliminating some expenses that many would say are necessary I am able to save a larger part of each pay check each month and are able to spend money on things that other would consider luxuries even though I am living more frugally than most other people. The illusion of what you need can cost you a lot of money and deprive you of things you really want. I would recommend that you go over all your expenses with an open mind and see how many things you can find that doesn’t bring joy or comfort to your life. Things you only got because it is expected of you or because it is things you used to like. By eliminating these things, no matter the size, you free up money to use for other things.

With this in mind I have recently started looking over my living situation. I am trying to figure out if it would be better for me to buy a house and move out of the apartment I am currently renting or if I am better of renting.

Borrowing money or selling stock

The first thing I looked at is whether it would be better to get a mortgage or to sell stock to be able to buy a house. I would be able to buy a house without a mortgage but if I were to do that I would need to sell a large part of my main portfolio.

It didn’t take long to discover that it is much better to get a mortgage than it is to sell my stock. The return I get from my stock is a lot higher than the interest rate on a mortgage and I would therefore lose a lot of money if I chose to sell my stock to buy the house.

I have a decent credit score and would be able to get a loan at about 3% interest. My portfolio is currently owning an average dividend yield of 4%. This means that the stock will earn more than the cost of the mortgage, which does not take rising stock prices into account. Just the dividends themselves.

It therefor seems clear that the best option for me in the current market conditions is to take a mortgage.

The yearly cost to buy a house will be about 3%. My yearly payment will be larger than that but I do not consider the down payments a cost. They are an investment.

Monthly cost of buying a house vs renting

The main reason to buy your own house is that it is supposed to be cheaper then renting. Rent is often referred to as a tax on the poor that transfers money to the rich who own the properties. But is this really the case. Is it cheaper to own a house then it is to rent.

I currently pay $1200 a month for my 2 bedroom apartment in a central location. The apartment building have a community pool and a gym in the basement. It also offer laundry facilities. A similar house in my area would cost about $260 000. The interest rate on a 260 000 mortgage would be $650 a month, $7800 a year. $650 is lower then the $1200 I presently pay. But there are a lot of cost associated with owning a house.

$550 a month adds up to $6600 a year. Is this enough to pay for renovations, property tax, garbage fees etc. I am not sure. Hiring handymen for the renovations can be very expensive. Any larger renovation such as redoing a bathroom, a kitchen, or replacing the roof or windows will cost a lot more than that.

I can personally not see any large financial benefits from buying rather than renting and this is despite the fact that I am not counting the down payment of the loan as a monthly expense. If I take that into consideration then it is likely that I would end up paying more if I bought a house.

Increasing value of the property

A common reason stated to why it is better to own then rent is that the property will go up in value and make for a good investment. There is no doubt that this has been largely true during the last 30 years but there is nothing that guarantees that this will be the case in the future. Property prices in my area are very high at the moment. This is true even when put into relation with the average earnings in the area. It seems very likely that properties wont be able to continue to appreciate in value as they have in the past because if they do then no one will be able to afford to buy them. I am not saying that it is impossible that they will keep going up in value but it is far from certain that so will be the case. I feel a lot more certain that stocks will continue to appreciate in value than I do with residential real estate.

A better option?

A better option might be to buy a fixer upper and then renovate it to a good standard. This is a good option if you are able to do a lot of work yourself. This doesn’t really describe me but I might be able to learn. It might also be possible to to find a property that  is a good deal even after I paid professionals to renovate it. The profits will however be nowhere as good as if I would be able to do the work myself.

Conclusion

I can not see any economic benefits that would make me buy a house rather then keep renting. Doing so might allow me to save a small amount of money but this would likely be spent on renovations over the years. I think it is better to keep renting and investing money in stock. Increasing interest rates might bring the house prices down and make it a more attractive proposition to buy a house. But right now it does not seem to be worth the hassle to save a limited amount of money each year.

With this said. It might be worth buying a house for other reasons such as being able to change the house in any way I want to suit my needs and to get a garden. But if I decide to buy a house it will be due to other reasons, not due to the economic benefits of doing so.