Monday, April 4, 2016

Shoulda, Woulda, Coulda

I have a small brokerage account at Robinhood that I use occasionally for very small stock trades. I like it for small trades because it wouldn't make sense to buy just a few shares of a stock if I had to pay $7-10 to buy it and then again when I sell. I don't like that I can only manage the account from my phone and not a regular computer and I have noticed some delays in trades being executed, so I don't intend on using the account for anything other than small trades where I don't want to pay brokerage fees.

A few weeks ago, I noticed that Tesla Motors ($TSLA) had dropped a lot and I decided to buy. They had dropped from around $200/share down to under $150/share in a matter of weeks. I've been following the company for a while and am a big fan of what they are doing, I even have some friends who work there. I only had enough cash in my Robinhood account to buy 1 share and bought it at $151.00.

Now, let met say that I would NEVER have bought 1 share of ANYTHING in my normal brokerage account (okay, maybe $BRKA, but I don't have that much money yet). Because I would pay ~$16 to buy and sell, the stock would have to go up by $16/share just for me to break even. Not only that, but because our investments total several hundred thousand dollars, I would need to invest several thousand dollars in anything for it to make a meaningful impact on our overall portfolio. I treat this Robinhood account as a teeny tiny play account. If I lost everything it would not be the end of the world, and my long-term goals don't depend on the account in the slightest.

So, I bought a single share of stock. Now, just a few weeks later, the stock is up almost $100/share! The only problem is, I already sold it for $202.50. I didn't need the cash for anything and I didn't buy anything else, it just felt like I had a good gain and figured, why not lock it in. Sure, it could have gone either way after I sold, so I'm still pleased with the 34% gain I made in less than a month, but it's sometimes hard to keep that in mind when I see it continue to climb and climb.

It's not the end of the world that I am missing out on more gains, but I learned some interesting lessons about my own behavior.

I learned that:

  1. I behave differently with my money when the amount of money I'm dealing with is relatively small

  2. Even though trading commissions are low, when they are eliminated I think less before acting

I also find it interesting what I mentally consider a 'small amount' of money. When I think about investing money, $150 doesn't feel like much. When it comes to spending money though, $150 seems like a lot more. I'm guilty of letting things sit in my Amazon cart for days or weeks deciding whether something is a want or a need and whether I feel I can delay the purchase. At the same time, I don't think twice investing thousands of dollars where I could make or lose $150 in an instant.

Numerous studies have come out and shown that the more active an investor is in trading, the worse their long-term results. Critics of Robinhood argue that just because they've found a way to eliminate trading costs, doesn't necessarily mean that it is a win for the consumer, and I tend to agree. Even though trading costs aren't dragging down investor performance, poor investor behavior is amplified. I'm glad I have my fun little account and it's enjoyable to play around with, but I know I wouldn't have been able to amass the funds we have so far if I were constantly churning my account and hoping to find the 'next big thing'. Instead, my real investments are primarily in much more boring index funds that I rarely touch. Having a big win like this may seem tempting to allocate more of my account to risky trades, but I have no plans of doing so since I know that I won't be able to replicate this type of trade on a regular basis (and neither can you, so please don't try with anything you can't afford to lose).

Friday, April 1, 2016

March 2016 Net Worth Update

March was another great month for building net worth here in the DIY$ household. Thanks largely to growth in the stock market, our net worth climbed another ~$17k to $539,890.
We didn't get any big bonuses this month but my raise at work kicked in which added about $500 to our monthly income without any change to our monthly expenses. This month was actually a pretty expensive one for us. We paid out about $5,000 in medical expenses and charitable contributions, and had a quick (cheap) trip to the beach. We also made a near double mortgage payment which boosted the amount of home equity included in our net worth. We have always paid extra on our mortgage, but paid even more extra this month since we had the cash and hate paying so much in interest.
It felt a bit crazy to set a lofty goal for growing our 2016 net worth, especially when the market started to tank right after I posted it, but it now feels like we're more on track to reach that goal. A lot of reaching the goal really will depend on market movement so if we don't quite get to $600k by year end, I'll still consider it a win if we save or invest at least as much as we set out to do at the beginning of the year. So far in the first three months of the year, we're up $30,000, and up almost $100k from the end of 2014.
As you can see, we've come a long way, and it's nice to track to keep things in perspective. I was reflecting recently that it was just a few years ago when I would track my investment accounts and get excited or sick to my stomach if they went up or down by $100. As our investments have grown, so has my comfort with market movement and the magnitude of the swings we've seen. Even though our net worth has been increasing, there are frequently days when our investments will fluctuate by several thousand dollars. I have comfort though knowing the investments all still have a long time horizon and that we are very diversified.