How to start investing profitably in individual stocks

So even after reading my warning, and despite all the ease, simplicity, lower risks and excellent returns of target date index funds, you still want to pick your own stocks, huh? Ok, keep reading, but don’t say I didn’t warn you!

Stock-picking Acid Test: do you have at least $100,000 in stock index funds? Have you paid off all high interest debt like credit cards? Are you on track to retire by at least 60-65? If not, go back to the basics first before you consider buying individual stocks!

I recommend keeping at least 75-90% of your portfolio in index funds such as a Vanguard Target retirement fund, and only allowing yourself to pick stocks for the other 10-25%.  That way, if you lose your shirt, you’ll still have plenty of assets to fall back on.  Alternatively, you could designate your retirement funds as index-only, and stick to taxable accounts for any stock picks.  I do this, since I don’t want to screw up my age 60 retirement accounts (401k & IRAs), but am willing to take a little more risk on my ‘early retirement’ accounts.

Also, diversification– owning several different stocks of different sizes in different industries– helps you lower your portfolio’s risk.  The right index funds give you that diversification so that you don’t have to worry about it as much when you’re picking individual stocks.

Quick start guide to picking your first stock

  • Start small (cap.) small investors have better chances beating the market than large investors when it comes to the sizes of companies they can profit from. Choosing a small cap company with a market cap between $500 million to $2 billion means you’re competing with far fewer institutional investors.
  • Learn how to read financial statements. Get your company’s latest 10-Q (quarterly report) and 10-K (annual report) and read it from cover to cover, skimming as needed.
  • Have the right attitude about valuations. The market’s prices are there to serve you, not to inform you. Every single company, which is what a stock represents, is undervalued at one price, appropriately valued at another price, and overvalued at yet another price. You’re investing in a partial ownership of a business enterprise; you’re not playing a casino game. As Ben Graham famously said, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.”
  • Understand how you can be fooled by randomness, and understand why ‘value investing‘ (<– famous Buffett essay)– broadly interpreted as trying to get more business value than the cash you give up in buying a stock– is the ONLY way to invest with a hope of beating the market.

Educate yourself

Peruse investing education websites like the Motley Fool (which unfortunately has a lot of link-baity junk too; but you can still find some good stuff on investing like this, or this.)  MoneyChimp is a great site too, with many investing (and general personal finance) calculators available.

Read superinvestor Warren Buffett’s ‘Letters to Berkshire Hathaway shareholders’ for free online (or consolidated in a much easier format in this book.)  The best book I’ve read to get a feel for the correct general investing philosophy is Roger Lowenstein’s Buffett biography.  I recommend this as a must-read for any would-be investor to learn the correct investing temperament, which is even more important than  learning how to value stocks.

Read Benjamin Graham’s classic ‘The Intelligent Investor’, or at least the chapters on ‘Mr. Market’ and the Margin of Safety concept (Chapters 8 and 20.)  Graham was Buffett’s teacher and, together with David Dodd, pioneered value investing with ‘Security Analysis’.

Peter Lynch’s One up on Wall Street and Beating the Street are also good. Philip Fisher’s Common Stocks and Uncommon Profits is excellent too, especially for the notion of ‘scuttlebut’; picking up (legal) insider tips on your own.

A less dense and very useful ‘just get started investing’ primer is the Motley Fool’s Million Dollar Portfolio book.

One word of caution: if you ever come across ‘technical analysis’, otherwise known as ‘charting’, run the other way as fast as you can!  Technical Analysis is a stock picking method akin to voodoo (and just as scientific.)  It involves looking at the past patterns in past price data (random movements in the market) for a given stock.  Supposedly, patterns like ‘head and shoulders‘ (I’m not making this up) are ‘buy’ indicators, whereas the ‘rounding top‘ pattern is something to fear.  If you think trying to divine future stock movements from random patterns in past price data sounds crazy, you’re right; don’t give this garbage any space in your brain.

Do your homework

Once you find a company you’re interested in, start looking at their financial data and business model. I use Yahoo! Finance for a quick look at financials and to track companies I’ve already bought or am considering buying in the future. Download annual reports (10-K’s) and quarterly reports (10-Q’s) from the Investor Relations section of a company’s website. Do whatever valuation techniques you like, but at a minimum compute some ratios (PE, PEG, Current, Quick, etc) and do a Discounted Cash Flow (DCF) analysis on a company’s Free Cash Flow (FCF.)  Valuation matters!

Plan to buy and hold a company… forever!

Warren Buffett is often quoted as saying his favorite holding period is forever.  What he means is that if you do a thorough job in steps 1 and 2 above, you should have found a company worth holding for a very long time.  Ideally, that great business would continue to be a profitable investment for years to come, so why wouldn’t you keep the stock?  There are some legitimate reasons to sell, maybe the business has changed, or maybe you overlooked some glaring issue at the time you purchased.  Maybe the all-star CEO has left and you’re not comfortable with her replacement.  Or, maybe you finally need the money.

Other than these reasons, plan on holding for a very long time.  Buy and hold investing forces you to do your research up front.  It also keeps you from trading too much, which incurs large costs and lowers returns dramatically.  Not only that, but the IRS tax code favors investors who hold their investment gains as long as possible (this last consideration doesn’t matter for retirement accounts that are tax-advantaged, like 401ks or IRAs.)

Track your portfolio’s performance against an appropriate benchmark index

Here’s the easiest way to do this, which is what I do to track my performance casually and easily.

Knowing your performance against a relevant benchmark. If you can’t beat the market benchmark, picking stocks is detrimental to your wealth AND a waste of your time. I recommend keeping your brokerage account that you use for individual stocks separate from the rest of your investments (i.e.: your index funds, bonds, and cash reserves.)

After you calculate your total return, calculate what your total return would’ve been if you’d made the same investments (amount and date of investment) in an index fund like the Vanguard Total Stock Market index fund (ETF ticker: VTI.)  Ideally you would like as long a time period as possible, as random fluctuations in your portfolio can make you lucky (or unlucky) in the short term.  Check your portfolio’s return against a benchmark at least every 6 months to a year.

If you can outperform the market for 3 years or more by a 1-2% each year, you’re doing very well. If you’re doing better than that, you’re crushing it compared to most investors. That might not sound like much, but it is when you can keep up that performance year over year. You might also compare the dollar gain vs the time you’re spending on it.


It’s very difficult to gain the knowledge, emotional attitude and discipline to be a successful stock picker. By using the resources about you’ll have a better chance than most, which still may not be enough. Stock picking can be fun, but make sure you’re giving yourself constant reality checks by measuring your entire portfolio’s performance against a major stock market index fund like the S&P 500. Use a buy and hold strategy with a long-term (5+ years) holding period. Thoroughly investigate the pros and cons of every investment before you buy. Good luck!

Final word of caution and advice

Be brutally honest with yourself: if this all sounds like too much work, or if you know that your initial excitement to do the work will lose steam in a few months, just buy broad low-fee index funds. Just ‘buying the market’ will result in huge compound returns over time, and beats the vast majority of professional money managers (because of their fees + taxes they generate from more frequent trading), not to mention all your friends.  Not only that, but target date index funds require practically ZERO work and maintenance, allowing you to ‘set it and forget it’ and get on with the rest of your life.

How I save thousand$$$ a year WITHOUT sacrificing lifestyle

Here’s how I overcome the two main reasons saving money is hard for people:

  1. Inertia (aka mental laziness)
  2. Loss aversion to cuts in lifestyle
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Seize the day and make just one change that will save you $100s or $1,000s per year!


Overcoming inertia– which is just a fancy way of saying ‘changing your habits’– is often where my clients get the quickest spending wins. Changing your automatic habits is often more about spending a little time to, say, shop for a better deal on something, or change your banking structure to build wealth by default, vs having less stuff or less experiences.

How do you overcome spending inertia? You can start by figuring out your spending, and then do one of these things which don’t involve any sacrifice of your lifestyle.

Cancel stuff you don’t use anymore

Here’s a few examples to motivate your own saving:

  1. Cancel any subscriptions that you no longer use, or use so rarely you’d never miss them. Never use Hulu anymore because you spend all your time on Netflix? Cancel it. Write down all your subscriptions– look at your last months’ credit or debit card statement to find them all– and then make notes on the costs and which ones aren’t worth it anymore, then cancel them. Click this Google query and replace the word ‘Netflix’ with your subscription to find out how to cancel it.
  2. Bought a gym membership but never go? Cancel it, and optionally substitute with some body weight exercises, or buy some (used) home gym equipment.
  3. Bought something you don’t use anymore? Sell or donate it to free up space in your home.

Substitute with a free or cheaper option

Substitution is another great way to cut costs without cutting fun.

  • Optimize your auto insurance to protect yourself for less.
  • The library is a great way to get free books, ebooks, audio books, streaming movies (yes, you heard me!), and other freebies like digital subscriptions to paid services like newspapers or Consumer Reports. Sign up for a library card at your nearest branch and see what they have to offer.
  • Cut your cable bill down to nothing with negotiation and dropping unnecessary services like modem rental.
  • Get something used or free from neighborhood marketplace sites like Facebook’s Buy Nothing groups (find your local one), Nextdoor, Offerup, or, if you must, Craigslist.
  • Switch cell phone plans to Consumer Cellular (I use and recommend them) or other small carriers like Ting. Google is getting into the act too. This takes a couple hours of time to port over your old number, but the savings will be several hundred a year for many people and most couples on a family plan. This is well worth your time and energy.
  • Ask your friends and family if they subscribe to a service that they can add you to for free. I get Netflix, Hulu, Disney+, and Spotify all for free thanks to the generosity of my friends and family. Worst-case you can of course offer to split the cost with someone–saving you at least half the cost of the subscription– but many people have open ‘spots’ on these subscriptions to add people, and are happy to do so for close friends and family. (God bless them!)
  • Do something yourself instead of paying for it. Yard work, simple car repair, dog-walking, cleaning, or even making your own hard apple cider are all skills that some people pay for but others do themselves. YouTube is your friend if you want to learn new skills. You might think you don’t have the time to do something, but remember that DIY’ing has other benefits too like exercise or using different mental or physical skills that have health benefits too. You also save the time it takes to shop or coordinate the service you pay for, and add to your own ‘personal capital’ whenever you enhance your skill set. Invest in yourself and save!

Loss aversion due to fear of lifestyle cuts

My clients are often resistant to even talking about spending cuts because they think it will mean a reduction in their lifestyle. While it’s true that we often overestimate the happiness we’ll feel when engaging in ‘retail therapy’, their concerns are legitimate. I try to get around this reluctance by recommending spending cuts that have small lifestyle cuts, or ones that are unknown, but can be easily tested and rolled back if clients find that they miss whatever they cut out. Remember that nearly every spending cut you make can be instantly and easily reversed, so there’s no risk in trying something out and seeing how it goes for a few weeks!

Reduce the frequency of repeat purchases, or delay an upcoming purchase

A great way to minimize the hit to your lifestyle is to just do a little bit less of something, and see if you really miss it.

  • One of my clients cut her housecleaning service from once every 3 weeks to once every 4 weeks. I don’t think this made any difference in her happiness– or any noticeable difference in her apartment’s cleanliness– but it cut this bill by 25%!
  • Delay your next haircut, massage, mani-pedi, or other personal care service.
  • Delaying the purchase of your next car is a big way to save money. Changing cars every 10 years vs every 5 years will save you tens of thousands of dollars. Investing that difference over time will add up to hundreds of thousands. Driving my car into the ground is one of the best ways I’ve built my financial independence.
  • Even just delaying routine purchases like a new cell phone or laptop will add up over time. This assumes your old devices work just fine for you. Don’t put up with glitches that are actually wasting your precious time or frustrating you!

Buy one thing at a time instead of subscribing

Ramit Sethi describes his a la carte method of just buying things when you want them as opposed to paying a recurring subscription fee. This method works great for things like streaming services (just buy one movie at a time), gym memberships (buy single use passes), or any other subscription service that you use infrequently.

This method works because we overestimate how often we use our subscriptions, and we rarely never do the math to see if it would be cheaper to just buy one thing at a time vs subscribing. Gym memberships are notorious for this. I was occasionally going to a 24 Hour fitness a couple year ago, and then I actually looked at how often I went (this gym actually tracked that for me on their website, those fools!), which was only once every 2 weeks! I immediately cancelled my $40/month membership and switched to using $10 day passes instead, saving me $20 a month.

I do the same thing with streaming movies. If there’s one I wanna watch RIGHT NOW that I can’t get through the library– or through one of my friends’ or family’s subscriptions that I freeload on– then I just pony up the $3-4 and stream it, no sweat. I probably do this less than once a month, so I’m saving a lot vs paying $12-$15/month for another streaming service.

Simply jot down the cost of your subscription, divide by how often you use it to get the ‘per use’ cost, and then cut the ones that are more expensive than buying a la carte. Or, just cut them anyway and trust that buying a la carte will make you think twice about using that service and thus save you money anyway. You can always re-subscribe later if it doesn’t work out for you.

Make small changes at first

Some A few people get very gung ho about saving money and try to cut everything down to the bone all at once. “I’ll never go back to Whole Foods and will buy everything on sale or at Costco!” they say, and within a week they’re back to cashing their whole paycheck for organic tomatoes and trendy skin lotions. Instead, start small to avoid noticing any loss in your consumption. (That’s also why I recommend small annual increases to your retirement contributions.)

  • Turn your thermostat down by 3 degrees in the winter, and up by 3 degrees in summer if you have AC. This will save you at least 10% on your heating bills, reduce your greenhouse gas emissions, and you’ll barely notice it. Just throw on a Merino wool sweater when it’s cold out– or move around a little more— and bank that extra cash.
  • Pack your lunch for work one extra time per week than you already do.
  • Make one more meal at home than you already do instead of ordering out.
  • Host drinks or dinner at home for a change instead of going out, and encourage your friends to reciprocate.
  • Say ‘no’ to one expensive travel plan (*cough* friend’s destination wedding) that you can’t really justify going to.

Where will your next $1,000 in savings come from?

Pick an area of your life that you can spend 1 – 2 hours on right now to realize some significant savings, and share what you do and about how much you’re going to save in the comments.

I have 10 great savings tips if you need more ideas, plus two more for homeowner’s.

How to opt out of the Washington State Cares fund for Long-Term Care insurance, and what it’s all about

*** If you just want to know how to opt out, skip down to here.***

Washington state recently passed a law to charge employees a payroll tax of 0.58% on their earnings. That tax will pay for a maximum lifetime benefit (NOT per year!) of $36,500 that people still living in Washington state can use towards long-term care services such as in-home help or a nursing/assisted living home.

This is a pretty small drop in the bucket towards long-term care costs for those that end up needing them, so as a financial advisor I would say it really doesn’t change the math at all when deciding whether you should purchase a (private) long-term care insurance policy.

How you become eligible for benefits

Employees that pay in for at least 10 years become eligible, as do those who worked at least 500 hours per year in three out of the last six years before they claim the benefits. Keep in mind that you’d have to actually be receiving your care in Washington state to get any benefit out of it…

Can I opt out?

By default, the tax only applies to employees unless you opt-in as a self-employed person. Employees can only opt out one-time if they purchase private Long-Term Care (LTC) insurance by November 1st 2021.

Per this:

Individuals who have private long-term care insurance may opt-out: Any employee who attests that they have comparable long-term care insurance purchased before November 1, 2021, may apply to ESD for an exemption from the premium assessment. The employee must provide proof of their ESD exemption to their employer before the employer can waive collecting the premium assessment from the employee’s wages. The employee must apply for the opt-out exemption to ESD between October 1, 2021, through December 31, 2022.

How to opt out for employees

Word on the street is that this is next to impossible to do on your own because Washington state private LTC providers have stopped issuing new policies (you’re welcome to try though.)

However, there’s an easy loophole that will work for many people: employers (Amazon, Apple, Boeing, for example) are providing LTC policies for their employees to purchase. It appears you have to keep your private LTC policy through all of 2022 to secure the exemption, but I’m not 100% on this. Worst-case you’ll pay at least 1 years-worth of premiums, but if you’re relatively young and/or in a high income bracket, it is almost certainly beneficial for you to opt out and take this premium hit!

Check with your employer and then enroll ASAP in their LTC policy to make the Nov 1st 2021 cut off for enrollment. THEN, starting on Oct 1st, 2021 (or after until Dec 31st 2022, apparently), you can file for an exemption with the state. Once you get your exemption letter, you must present it to your employer to avoid paying the 0.58% payroll tax that will start January 1st 2022.

After you get your exemption letter, or perhaps after the year 2022 ends, you can cancel your LTC coverage through your employer. (I assume it’s always possible to cancel at the end of a year, or at least whenever you have open enrollment for benefits, but just check with your HR folks to make sure.)

So, get on it and opt out and save yourself a career’s-worth of 0.58% taxes. If you make $100,000 a year, that’s $580/year for the rest of your career (more if your income goes up over time.)

It’s always possible that in the face of a wave of high income people opting out, the state may be forced to retreat and repeal the tax, but that feels like a long-shot, and there’s no guarantee of that. Even just 2 years or so of avoiding the tax will likely make you break even on the employer premiums you pay, depending on your income and what your employer’s LTC costs.

One person I know at Apple paid an annual premium of $1,200 for an LTC policy covering both him AND his wife– check for spousal coverage so that your spouse can opt out too if their employer doesn’t offer LTC coverage– so it was well worth it for them.

What about the self-employed?

Self-employed individuals can decide to opt-in to the tax and benefits. I am self-employed and I do not recommend opting in unless your lifetime earnings under the opt-in are expected to be pretty low. How low, you ask? Well, let’s do some math.

The benefit is $36,500 total in today’s dollars, and the tax is 0.58% of your total self-employed earnings (the state collects it on both any wages you pay yourself as well as your net business earnings.)

Based on my math, if you expect to work until you’re 60, expect to earn 5% after inflation on your investments, and have a 52% chance of using the LTC benefit with an average age of starting benefits at age 85 (I grabbed those assumptions from here), the break-even decision point is an annual income of:

  • $90,000 if you’re 50 years old and work at least 10 years
  • $36,000 if you’re 40 years old and work at least 20 years
  • $18,000 if you’re 30 years old and work at least 30 years.

If you make more/work longer/are younger than any of these scenarios, you’re better off not opting in and simply investing that 0.58% of your income into a long-term investment account, like an IRA/401k. The math applies to employees as well who are considering whether to opt out, but again, they can only do so if they’ve already purchased (expen$ive!) LTC insurance privately.

Lastly, this assumes you stay in Washington state. If you think there’s a good chance you won’t retire here, then you should also NOT opt in.

Would you ever hire a financial advisor? Why or why not?

Tell me at the survey link below why you would or wouldn’t hire a financial advisor. It’ll only take 5 minutes, and you can see what everyone else thinks after you complete the survey. I really appreciate it! 🙏