Today’s question comes from Anna from Oregon…
“I’m 22 years old. I have a Roth IRA, a taxable brokerage account, and an emergency fund with almost a year’s worth of expenses.
I know that in the FI community the emphasis is towards index funds, which is great. I’m wholeheartedly behind that, and that’s what all my investments are in.
However, I’ve also been thinking about dabbling in single stocks. Not for the money, but more just for the thrill I suppose you could say. So, literally just for the dopamine hit, which is really bad, but anyway…
If I were to do so, with small amounts of money, what would you recommend as the best way to go about that? Should I open a separate brokerage account at Vanguard which is where the rest of my investments are?
Or I’ve heard good things about M1 Finance, since they let you separate your investments into pies. Just curious what your take is on this. Thanks.”
Matt & Joel’s response: I love your question because you know exactly why you want to go this route.
You don’t have dreams of striking it rich by taking on more risk and riding Nvidia to the moon. You’re doing it for fun – literally for the dopamine hit, haha. That self-knowledge is powerful.
OK, here are our thoughts on how you might go about investing in single stocks…
How much should you dabble with?
Firstly, make sure you aren’t putting money on the line that would cause you to lose sleep at night. If losing more than $400 at the craps tables on a weekend Vegas trip is your number, stick to it!!
Single stocks can be extremely volatile. Any money you invest could be lost completely. So never invest money that will increase your stress levels or put you in a financial bind.
We typically suggest a max of 5% of your overall investment portfolio be used for speculation of this kind. This can be the “fun play” money to satisfy your curiosity. Whether that includes trading single stocks, buying cryptocurrency, or other alternative investment options, keeping it under that threshold is key.
If you have a small portfolio, that might not be much. Which is a good thing! Folks with tiny retirement accounts shouldn’t be messing around by day-trading stocks in a Robinhood account. Long-term index funds should be the overwhelming priority.
But for those investors who have built up a significant portfolio, 5% could be a really large number. Someone with a $1M nest egg has $50,000 to play around with! Risking that type of money is not for the faint of heart. That’s why we generally advise a 5% max, but it could be wise to rein that speculative investment amount in even more.
Setting boundaries
Honestly, whenever someone mentions investing in individual stocks, it makes me think of gambling. It can get out of hand quickly. It can, of course, become a real problem.
These days, it’s never been easier for gambling to get out of control because it’s at your fingertips on your smartphone. You can literally wake up with night sweats and make a trade if you want! Trades might not settle until the morning, but with 24/7 trading catching on, it might!
So constraints are key. Actively seeking that dopamine hit – as harmless as it sounds – could morph into a real problem over time. So be careful.
It might start out exciting. But down the road it could become stressful, ruining your attitude, relationships, or more.
So make sure you’re setting clear goals and boundaries for your riskier investing choices.
Picking a brokerage
Now let’s get to the heart of your question. Where do you open this account!?
I like the idea of keeping it separate from your retirement accounts. Although it’s not crucial or necessary.
But keeping things apart can act as a firewall of sorts. If the majority of your long-haul investments are with one of the major low-cost brokerages, Vanguard in particular, you could do your single-stock investing there too.
I actually think it makes sense to have a separate account so that you aren’t tempted to commingle funds. It also keeps those boundaries more clear.
M1 and Robinhood are two of the best platforms and I’d probably roll with one of those if I were you. Their functionality is just so much better for what you’re trying to accomplish.
M1 vs. Robinhood
I don’t think you can go wrong with either one. You mentioned being attracted to M1 so it likely makes sense to start there.
And they seem to put less focus on the pomp & circumstance, like Robinhood does. The less “gamified” the platform, the better.
Also the M1 pie setup makes a lot of sense. It’s cool how you can choose a few specific stocks in your pie. And if you want to maintain a specific allocation amount, M1 will help you rebalance that pie with new contributions automatically.
Capital gains tax
Something else worth mentioning – Don’t forget about the tax bill and the paperwork!
If you’re day trading you could find that your attraction to single stocks makes for a miserable March/April at tax time.
Go ahead and dabble, but making fewer trades and having a longer timeline is a superior approach from both a mindset and a tax perspective.
Long term capital gains tax kicks in for investments that have been held over a year. Anything shorter than that time frame, be prepared to pay your current income tax rate for those gains.
The Bottom Line:
For investing nerds I totally see how single stocks can be fun. Anna, you’re already doing really smart stuff with your money, crushing it SO HARD at the age of 22 with a Roth IRA, taxable brokerage accounts, and a sick cash backstop. You’re in a good financial position to take some risks if you want!
As long as your single stock investing is contained and you’re doing the boring stuff with the bulk of your investment dollars, we don’t see any issue.
Some folks believe – and I can totally see how this is true – that having a separate investment account for “play money” can act as a pressure release valve. M1 or Robinhood would be a great choice for you and allow you to keep all those funds separate.
Good luck, Anna!
For the full version of this discussion, check out Podcast Episode #859 (it’s the 2nd question in the episode)
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