SPACs are risky. How should one begin. Part 1.
Steps beginning investors can take before diving into high risk investments
Part 1 of “SPACs are risky” edition is a high level, beginner investing discussion. Part 2 will dive into strategies I’m using to invest in clean energy SPACs (special purpose acquisition companies). You may be asking why I’m talking about Part 1 at all. Guilt. There are many people subscribed to this newsletter that don’t spend every day watching the stock market. I do not want to contribute to the loss of money by retail investors because “DT said so in his newsletter”. If you are a seasoned investor, have an appropriate emergency fund, max your 401k contributions, and have brokerage accounts, feel free to skip to Part 2 (coming soon).
Do you consider yourself an investor? In Gallop’s annual polling of Americans, only 55% had any money invested in the stock market in 2019. Oddly enough during the COVID-19 pandemic, Americans have opened up between 10-20 million new accounts likely driving ownership back over 60%.
During this time, we’ve been stuck at home, no where to spend money, received stimulus checks, and read stories of a few lucky bastards who made a lot of money trading “meme stocks” (perhaps you’ve heard of Gamestop, AMC, and DOGE coin). Fear and greed are human’s biggest motivators and greed definitely took center stage. The real story is that most retail investors lose money trading stocks. The psychology of owning a risky asset plays tricks on us where most end up buying high (greed) and selling low (fear) —>> losing money. Jumping in to buy DOGE coin with your life savings is not the right way to think about it. There is a name for that: Gambling.
So Dan, how do I begin investing?
Let’s start with a base premise that there are four main asset classes to which you can allocate capital investment:
Stocks
Bonds
Cash
Alternative investments (real estate, art, commodities, crypto)
These asset types will be important to keep in mind as we talk about the five hurdles to jump over before investing in risk assets such as SPACs. I want you to get there, but you should have a solid financial base and an understanding of the risk of investing in innovative, clean energy companies coming public through SPACs.
Hurdle #1: Have Cash.
Most financial planning experts recommend having three to six months of expenses stored away in cash (savings or checking account, under a mattress). This is too ensure you are covered in case of emergencies such as loss of job or medical reasons. My take: build two months worth of cash in the bank first, then continue to build to six months simultaneously in index funds as they are easily convertible to cash if you need it. Having adequate emergency funds provides a cushion and a comfort level before investing in the other asset classes.
Hurdle #2: 401K contributions.
If you work for a company that matches your 401K contribution, put in at least as much as they match. For example, they match 100% of first 4% you put in, you put in 4% (or more). Take advantage of this ‘free money’ match. Quick tip: on your next raise, put one-half of the raise into your 401K contribution. If you were at 4%, then received a 3% raise, increase your contribution to 5.5% (4% plus half of the 3%). You get a tax break on contributions and your money grows tax-free until you take it out. Think early retirement.
Hurdle #3: Open a brokerage account and fund monthly.
There are many brokerage firms out there that provide good online services and commission free trades. Fidelity, Ameritrade, Schwab, E Trade are just a few of the top names (Robinhood, EToro, and Public are some new ones). Once you open an account, set up automatic transfer from your savings to your brokerage account and have it invested in a S&P 500 index fund. Do this for 6-12 months and check your balance at least monthly. Begin paying attention to how the markets are performing each day/week/month, read articles on things that positively or negatively affect stock prices such as interest rates, employment figures, Federal Reserve actions, new innovations, and mergers/acquisitions. Read about industries or companies where you have an interest. Build up your knowledge base and become comfortable with the stock market. The water is fine, jump on in.
Hurdle #4: Buy an ETF and/or an individual stock.
When you are comfortable with a basic understanding of the S&P 500 index and the market in general, its time to dip your big toe into the pond. Buy an individual stock or targeted ETF fund (for more info on ETFs (Exchange Traded Fund (ETF) Definition & Overview (investopedia.com). Best way to pick your first stock is to buy a company that you believe in. Love plant-based meat, buy Beyond Meat. Live for Disney World, buy Disney. Ride the bike in your basement seven days a week, buy Peloton. You are a genome scientist, buy Crispr. Love your iPhone, buy Apple. And so on. When you buy a stock, you own a piece of the company. It is a great feeling to actually own some of your favorite companies/brands in industries you believe in. Buy and hold. Don’t get worried about daily price swings for the next 6-12 months. How did you handle it (it = the risk/return of owning an individual stock)? If you’re feeling good, let’s move to the final hurdle.
Hurdles #5: Read the Clean Energy SPAC Portfolio newsletter
Okay, hurdle #5 is a shameless plug for this newsletter. It is important to do your own due diligence on companies before you buy. You should know what you own. This newsletter would only be the beginning because it provides companies, industries, and ideas inside of the larger category of clean energy. Additionally, your research should answer questions like: How does this company make money? Who does it sell to? What kind of profit does it make? Who are the competitors? Is the industry growing in the future? What is the valuation (and how does it compare to other companies)? How does this company differentiate its products/services to stand out and be a winner in the industry? And many more Q&A.
If you have made it through the five hurdles, you are ready for Part 2 which sets out the answer the question: what strategy should I use to invest in clean energy SPACs? Too be published in August. Until then, be safe out there!
Now that this newsletter is on Substack, you can comment on the topics, ask questions, or respond to others. Let’s have a discussion.
Want to go deeper with developing your own financial plan.
You should have a plan. To have a plan, you need to answer some questions to figure out where you are and where to want to be. Your plan will be different than others depending on the financial goals you have, where you are today, your comfort level with risk, timeframe to achieve these goals, and more. This newsletter is not developed to create your financial plan, but if you are ready to dig in, here is a link on WikiHow: How to Do Your Own Financial Planning (with Pictures) - wikiHow
This is for educational and entertainment purposes only. It should not be considered financial advice. See a financial advisor for investment advice.