Purchase Size: What Do You Do?

[Dividend Watcher]

Jimbo posted a reply to earthtodan in the Introduction section thusly:

(04-03-2014, 03:12 AM)Jimbo Wrote: I read an article on SA about a guy that is buying small positions and most responders were workin him for buying so small of lots. Uggghh, thats my style.

I missed that article so don't know any of the details but Jimbo's comment struck a chord with me. Presumably, the person on SA was being excoriated about buying in lots of less than $1000 or so in value That is the premise I am basing this thread on.

First off, I know the angst you can feel when everyone around you is bragging about their 200 or 300 share purchases. You wonder whether you are doing the right thing or just cheating yourself. I thought about this a while ago and came up with my rationale.

In my wife's portfolio, which I've delineated someplace here, I've often purchased in lots of $500-$1100. In fact, that's the most common size of the trade. Her portfolio is smaller and the revenue stream we can divert the money from is highly cyclical. Rather than sit for what may be months before we can add a significant chunk, I keep scanning our porfolios and watch lists looking for a situation where Mr. Market is offering a fair value. When I find something, I just may purchase it.

I've also done it in my portfolio. In our portfolio spreadsheet, I have a sheet that has the "dream portfolio" with desired sector and size allocations. From those numbers, I calculate the number of shares we need to own to meet those desired allocations. If I'm short 5 or 15 shares and the stock drops into what I feel is a value range, I'll purchase them to bring that section of the portfolio to the desired size. Sometimes I want to add a new position and my free cash is only a few hundred. If the price is right, I'm not afraid to buy even though the transaction cost is still over 1%.

If you're only investing $500 and the commission is $10, the transaction cost is 2%. Eeks, that's a little high. But if it's a dividend growth stock and a solid company, you can amortize that commission over 5 years to a more reasonable 0.4% annually. Are you planning to hold this company for the long term or are you just speculating? In the meantime, you can compound that dividend over 5 years. Compare that to the 0.1% or less many brokers are paying in your sweep account and you come out ahead.

You can also look at the mutual fund example. You're Mr. Small Fry Investor and everyone is telling you that you're stupid for investing in individual stocks with those small amounts. Right now, KO is trading about $38 and yielding 3.2%. Is there a growth & income style mutual fund you can buy right now yielding over 3% that has KO's brand name, the distribution system and a 50 year record of increasing its payout to you? In the meantime, what is their management fee? Even Vanguard, the iconic "cheap management fee" mutual fund company, will probably ding you 0.3-0.5% annually in management fees forever. Imagine being in your 30's and buying $500 of KO every year for the next 30 years and reinvesting those dividends. Do that with KO, PG, EMR, XOM and AFL for 30 years and come back and tell me (ok, maybe my kids since I won't be around) about it. Gawd to be young again.    

Now I know everyone on this board is richer, smarter and better looking than I so maybe this doesn't have any relevance to you. However, if we have some whippersnapper gawking at these pages that is in the same boat as I am, I encourage you to think through this yourself and see if it makes any sense.

What do you do?

[EricL]

I generally invest in increments of $500 with a transaction cost of $8.95. This allows me to make a purchase every other month based on contributions from me/my employer into the 401K.

The majority of the stocks I own fluctuate more than 1% on a daily basis, I'm really not concerned about paying a 1.8% commission to buy when I want to and it seems really silly to me to wait another two months to make a buy with a $1000 lot just so I can save 0.95% in transaction costs.

[cannew]

I've always tried to keep my commission fees to less then 1/4 of 1%. I much prefer to have NO commission fees at all and that's why I strongly recommend using DRIP's and SPP's for those who can only afford small amounts or just want to eliminate fees. In fact it's the best method for those who are just starting out, can only invest small amounts or to invest for kids or grand kids.

DRIPS's re-invest all dividends, buying partial shares. Those partial shares add up quickly over the years! Avoid Mutual Funds & ETF's, even the smallest fee will eat up your long term profits.

[hendi_alex]

If buying small amounts why not use a broker such as sharebuilder where commissions are as low as $3.95 plus can accumulate partial shares.

[Dexter]

I probably take this to the extreme.

I buy things in very small increments, $10-$100, or 1 share at a time, but pay no commissions by using the right brokers and/or DRIP programs.

Every once in a while I'll make a bigger purchase and pay the typical broker commission of $8 or so. I only do this when I really want something. In this case I try to keep my fees to < 1%, usually < 0.5%.

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(04-03-2014, 10:10 AM)EricL Wrote: I generally invest in increments of $500 with a transaction cost of $8.95. This allows me to make a purchase every other month based on contributions from me/my employer into the 401K.

The majority of the stocks I own fluctuate more than 1% on a daily basis, I'm really not concerned about paying a 1.8% commission to buy when I want to and it seems really silly to me to wait another two months to make a buy with a $1000 lot just so I can save 0.95% in transaction costs.

Really interesting argument. Thanks for this.

[Jimbo]

DW, The article is "My income portfolio quarterly update (q1 2014) by Invest yourself.
If I was tech savy I would attach.
I reread and he does use sharebuilder (for a small buy fee).
Excoriated is a perfect word.
I buy in smaller lots also as I dont have a large "fund" to pull cash from (California Bay Area is expensive to live in).
Back in 95 I bought a small lot of GE and am sitting on a nice chunk now. AAPL I bought in small lots ( for myself and each of my kids college fund) and have done well there also.
My problem with the "abuse" Invest yourself got was simply, not all of us can buy 1000 shares of each company and for those (like myself) who are TRYING to help ourselves good for us and dont want to see the small investor lose hope in their quest. Buy small if thats all you can afford, solid companies and DRIP it and watch it grow.
Jimbo

[Dividend Watcher]

Finally read the article. I don't think he was excoriated, more along the lines of being chided. I've seen a lot worse on SA from the "big spenders". Doesn't change my thoughts on the subject.

Every time I go to the Sharebuilder web site, I can never find more details about the accounts. Just suspicious of any financial company that doesn't specify all their terms and conditions before you sign up. I suppose I could call but lately I barely have time to talk to my customers during business hours let alone sit on the phone with a salesperson. When I get home at 10 or 11, I'm just too lazy to do it.

[rnsmth]

My positions range from $5,000 to $1,500. I consider around 3,000 to be a full position. I typically buy 1/2 to a full position in mt initial purchase.

[EricL]

Sharebuilder pricing is here and here.

[TomK]

Of course I think that minimizing commissions is important, but it should not prevent anyone from building their portfolio. If you only have a little bit to invest each month, then you do the best you can, but don't keep you money on the sidelines to avoid an $8 commission. Especially in the early stages, it is important to get your money into the market and working for you.

[KenBob]

While investing every month with additional savings is a goal of mine, my wife's account is purely dividend reinvestment. I don't think investing on a quarterly basis is too excessive to avoid commission costs with a small amount of money. Most companies only pay a dividend on a quarterly basis.

[hendi_alex]

I don't understand this preoccupation with cash 'burning a hole in the pocket'. I prefer to let the fresh cash both from dividends and from new savings accumulate until the market presents some obvious bargain.