The Jared Dillian Letter

Pizza Investing

Here are some things that are good when sliced...

Pizza. Pies. Quiche. Exceptionally large cheese wheels. Deli meat.

You know what serves absolutely no purpose when you slice it?

Stocks.

Yet everyone is on Schwab and Robinhood buying up these so-called "stock slices" for $5 or even as little as $1 a pop.

Every time I hear about people investing in fractional stock shares, I have the same thought: "That isn't really investing. That’s screwing around."

Which is fine. If someone wants to screw around with stocks, fine. But they're not Paul Tudor Jones. They're not a hedge fund manager. They don't know what they're doing.

And if they make any money, it'll be by accident.

Here's the Whole Picture

Now, you might wonder why I sound like Debbie Downer over such a "revolutionary" idea. "Let them eat cake—er, buy stock slices!"

One. It preys on people who are looking for a "get rich quick" scheme, and...

Two. It's evidence that you're probably managing your finances incorrectly.

If someone only has $5 to invest in a stock slice, it tells me they don't have an emergency fund, they can't max out an IRA, and they probably carry some form of debt.

Let's say you put a total of $25 into a $1,000 stock, and this stock returns 10% in a year.

Someone who owns the full stock makes $100. Your dinky slice made $2.50.

If you look behind the mirror, the person who owned the whole stock definitely owns more than one full share. In fact, they're most likely sitting on a fully diversified portfolio.


They are setting themselves up for success in retirement.

The only thing you can afford with the profits made from stock slices are actual slices of pizza.

Paying capital gains tax on a $2.50 profit is just ridiculous. Insult to injury.

So, What Do You Do?

The path to financial freedom (or at least comfort) has actual steps. And you don't want to skip any of them.

Your first goal should be to save $10,000 or six months of living expenses. At a minimum.

This ensures that if "the worst" happens, you have a pad. That means you are ready for anything from a check engine light to a fat invoice from your doctor or lawyer.

Then you need to put your back into paying off any and all debt. I suggest using the "Damn, this hurts" method.

Start with the highest-interest debt and work your way down.

Doing that silly snowball thing (popular with other personal finance guys) makes you feel good. But it doesn't address the fact that higher-interest debt is adding hundreds back to your debt total each month.

Put every spare dollar you have into paying off your debt. Don't suddenly decide you need a separate vacation fund, or college fund for your kid. We covered this last week... you're not helping yourself. 

Your next goal is to max out your IRA. Know how much it takes to max out that sucker? $16 a day.

Set aside $16 a day or $115 a week. By the end of the year, you'll hit the current $6,000 contribution limit.

Do that for 40 years, and you’ve got $240,000 before any investment returns. Factor in an average annual return of 7.9%, and you’re looking at over $1.5 million.

Now, It's Time to Start Making Money in the Markets

I always say you need at least $100,000 before you start investing in individual stocks.

That makes investing sound like a rich man's game... but there's more to it.

When you first start out, you need to make sure your core retirement portfolio is balanced/diversified.

After all, your retirement is nothing to mess with. You don't use your core portfolio for speculation. That's how you end up with Meals on Wheels at 70.

To get this right, you need to divvy up your portfolio across five key asset classes: stocks, bonds, gold (precious commodities generally), real estate, and cash. Allot 20% to each.

"But, Jared, you just told me not to buy individual stocks. So, what in the Hades am I supposed to buy?"

Glad you asked.

Exchange-Traded Funds.

ETFs are like stocks, but instead of investing in one company, you're tracking an entire market sector.

So, if you followed the 20% rule I lay out in The Awesome Portfolio, you'll end up with...

$1,200 in a stock ETF (there are ETFs that track the entire market),

$1,200 in a bond ETF,

$1,200 in a gold ETF,

$1,200 in a Real Estate ETF (or REIT), and

$1,200 in cash

(based on a $6,000 a year IRS contribution limit)

More Is Better

Now, maxing out your IRA every year is fantastic. But ideally, you want to save and invest as much money as humanly possible.

If you’re in your 20s, that means at least 20% of your take-home pay. If you’re starting to invest in your 40s or 50s, you want to up the ante and invest 50% of your take-home pay.

So, let's say you max out your IRA and you save up $100,000.

By this point, your understanding of money has grown along with your accumulation of it. It's not likely you're going to do anything stupid money-wise, at least not purposefully.

So, if you want to start speculating a bit, go ahead. I personally set aside 10% of my non-retirement investments for riskier investing ideas.

If you don't like the idea of higher-risk trades (which is fine; life isn't a rodeo), then consider going with an actively managed mutual fund. You set it and forget it… and let them take the wheel.

You will not regret that move.

If You Want Discounted Stocks, How Do You Get Them?

Easy. Wait for that sucker to split.

When stock prices go up, they become difficult to transact. Bid/offer spreads blow up. It becomes expensive to trade.

Which is what's happening to Amazon. (It's sitting at about $3,298 per share right now.)

If you look at the bid/ask spread during the day, it's usually $2 to $3 wide. That's expensive.

If Amazon was a $50 stock, the bid/ask would be a penny wide.

  • It's no good if there are high transaction costs with the stock you want to trade.

That's one reason to split the stock. Here's another…

  • When a company splits its stock, it forces the price up.

Why does that happen? If you take a stock and split it into two halves, then each half is of equal value, right? So, what gives?

Here's the thing to understand about stock splits. It's all about signaling.

For example, you don't split your stock if you think it's going to go down.

By splitting a stock, you are communicating to shareholders that you think it's going to keep going higher.

Splitting is a sign of optimism.

Whereas buying stock slices may signal that you’re not taking your financial future seriously.

It literally pays to be fully invested.

Jared Dillian
Jared Dillian


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