Feb 19, 2008

Risk vs Reward

I always thought that when it came to risk, I'd avoid it at all costs. Skydiving of the body or the spirit was not for me. Sure, I moved a lot and took tiny little risks like living on my own with no job, but nothing beyond riding a roller coaster known for its safety record.

Now that I'm getting into the stock market, albeit very slowly, I'm ever-so tempted by risk. Yesterday I found the blog of Timothy Skyes who is famous for turning his $12k of Bar Mitzvah money into more than $1 million. He loves the thrill of day trading and obviously it has paid off for him.

I don't think I'll ever be able to take my entire savings and make some educated guesses about where to place my bets on Wall Street, but I am getting more and more interested... and risky... when it comes to my relatively small stock and ETF purchases.

It surely is an addiction. A year ago, I finally took the "leap" of putting a huge chunk of my savings into a Vanguard index fund to open a ROTH IRA. But index funds, especially ones that cover multiple industries with no specific focus, have already started to bore me. Additionally, with the way the overall stock market is performing, watching my "less risky" investments tank makes me want to take more risks so I feel like the failure is, uh, much more deserved.

I started out a month ago buying a few shares of GLD, the Gold ETF. Everyone is screaming "gold" these days, as with the recession such commodities seem to thrive. GLD is the main gold ETF available for purchase. I started out buying about 4 shares of GLD and adding some more funds to that ETF. I'm not sure if I should buy more.

This purchase was followed by investing in McDonalds and Comverge (COMV). I figured why not start with one large cap, and one small cap. They ought to balance out in the middle, or something like that, right? Comverge was a company I had covered in the past as a cleantech reporter while they were still private, and I liked what I knew about them. However, I also acknowledged the fact that I had no idea whether they could turn their good idea into a profit for the company. But I always wanted to buy shares in them just because, well, I felt like it was one company I had been following from near-birth, and if anything I wanted to watch them grow (or fail) with a small amount of my money attached.

Meanwhile, McDonalds, I read, was a good buy because it offers yearly dividends to investors AND its price right now has gone down with the current recession.

After a few days it became clear that my Comverge purchase, although not the end of the world, should have been spread out over time so I could have "cost dollar averaged" and saved money. I bought a few shares of the stock for $23 each and since then they've gone down to $18 a piece. Now they're at about $19.50. I'm considering waiting (hoping) they go back up to $20-something again and then I'll sell them so my loss isn't that huge and instead invest them in another stock or ETF that might actually perform well. Or I can keep the $100 in COMV and watch it disappear. Who knows, maybe the stock will soar one day. I'm waiting for the quarterly earnings to see how they've done, and see what that does to my four shares.

Meanwhile, I found that I'm now hooked on investing. I quickly signed up for Sharebuilders "$12 a month" 6 "free" trades plan and started to pour about $300 a month into a variety of stocks and ETFs. This time I did a bit more research and picked the following three stocks/ETFs to invest in:


What do all those letters mean?

KOL: An ETF of coal. Why coal? It's terrible for the environment. Yet with the prices of oil rising, and other cleaner alternatives far from being able to provide the energy needed in the world, I think coal has (for better or worse) a pretty strong future. I was excited to find the fairly new ETF that would allow me to get into coal with a little less risk. I plan to keep putting about $60 a month into the ETF to see if I can prove myself right. Also, a lot of the ETF is invested in Asia (coal is huge there and growing), so this gives me the Asian diversification I've been seeking.

EWZ: This stock symbol doesn't give one a clue of what the stock is! It's actually an index fund of companies in Brazil. A lot of advisers seem to be recommending it, and I want to diversify my overseas investment so it's not all in coal and Asia. Brazil has a lot going for it and the ETF has performed quite strongly in the past. Will it perform as well in the future? Beats me. I'm investing most heavily in this index fund right now, putting in about $150 a month to EWZ.

WFM: Whole Foods. I spend enough money shopping here! This is another dividend-paying, large cap stock. Not that interesting. I doubt I'll make a fortune on it, but it might at least grow slowly and calmly. Or I'll lose some money but I'll try to get out before it tanks.

One thing I've learned is that in order to make a stock purchase worth it, I eventually need to own a lot of that stock. Even if the stock goes up $10 from $10, a 50% increase, if I only own one share and have to pay $9 to sell it back, that amazing performance will only make me $1. So I've decided to try to focus on these six stocks for now, and if needed to sell one of them and replace it with another. Six seems like a good number to start with, and I'll let my portfolio grow as needed or merited by my income and thirst for risk.


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