02-12-2015, 04:08 PM
(02-10-2015, 05:54 PM)Jago Wrote: I think that especially for new investors just starting out, if they intend to go the route of picking stocks instead of buying a nice and broad basket via an ETF or a mutual fund, diversification is of vital importance.
I agree 100%. Which is exactly why I personally think that low commissions play a big part. Let's be honest here, most 20-something year olds won't have A LOT of money to invest. Say they put aside $300 a month, which I honestly think is quite a bit of money for someone just starting their career.
Paying $10 per trade, I really don't think you could invest more than once every 3 months, so you would have a total of $900 to invest. Still goes a bit over my personal preference of 1% max commission but we will let that slide.
So 4 buy transactions per year. Within 2 years you can have a well diversified portfolio (8 different companies, which I think is enough if they have been chosen well) if you only buy each company once.
Now change the commission to $3, and you could make one buy monthly. That would allow you to gather, for example 6 different companies in the first year and buy each twice so we also get some dollar cost averaging (diversification too!) into the game. A much more diversified portfolio in half the time.
When the commission is high and the amount to be invested is low, you are pretty much forced to make ONE choice. If your commission is so low that it doesn't matter, you can make 5 choices with the same amount of capital.