Transaction costs and young investors

[hendi_alex]

I've noticed where quite a few young investors seem inclined to buy modest amounts of each ticker, paying really high trading costs as a result. I would recommend that those individuals buy shares of an appropriate ETF which can be bought commission free. When the value of the ETF gets to a decent level, sell shares and buy an individual ticker if that fits the investment theme better. Buying the ETF say of a dividend aristocrats type of ETF or blue chip ETF would keep one from missing out on market upside. Such a strategy could easily move transaction costs to 0.5% or less. That is the threshold for me. Won't pay more than 0.5% transaction costs, but usually try to keep the buys at about the $5000 level or higher in my modest retirement portfolio. For a young saver, it would seem that keeping purchases above $750 or $1500 should be easy enough. Up front costs or 2% or more is just too costly and will really hurt performance in later years.

[benjamen]

(11-10-2014, 02:56 PM)hendi_alex Wrote: I've noticed where quite a few young investors seem inclined to buy modest amounts of each ticker, paying really high trading costs as a result. I would recommend that those individuals buy shares of an appropriate ETF which can be bought commission free. When the value of the ETF gets to a decent level, sell shares and buy an individual ticker if that fits the investment theme better. Buying the ETF say of a dividend aristocrats type of ETF or blue chip ETF would keep one from missing out on market upside. Such a strategy could easily move transaction costs to 0.5% or less. That is the threshold for me. Won't pay more than 0.5% transaction costs, but usually try to keep the buys at about the $5000 level or higher in my modest retirement portfolio. For a young saver, it would seem that keeping purchases above $750 or $1500 should be easy enough. Up front costs or 2% or more is just too costly and will really hurt performance in later years.

I also try to keep my costs under 0.5%. Most websites charge $5-7 per trade, so as long as I spend at least $1000-1400 per stock purchase I am good. This does limit the number of trades you can do in a period, but that may be a good thing.

[hendi_alex]

Yep, there is no good reason to buy ALL of the candy in the candy store! Only having enough cash to buy one or two positions at a time probably forces a person to be far more selective than might otherwise be the case.

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I guess another excellent alternative is to invest exclusively via drip while the investing cash flow is very small. I'm still thinking that the diversity offered by an ETF may be advantageous however, at a time when the possible number of individual tickers is very low.

[Concasto]

If you have a Schwab account there are no transaction costs for buying SCHD, which is in my opinion the best "DGI ETF" there is.

[DividendDragon]

Hi Hendi.

I'm one of these 'young investors' paying incredible fees.

However, this seems to be a theme here in the UK with the STANDARD charge being £11.95.

My friends are all in the same boat.

My next allocation of funds will go into an accumulation fund. I will then invest a monthly amount along with purchasing individual stocks when I have a large amount of capital available.

[daat99]

You might want to try changing brokers.

Due to high commission rates in my country ($15+ per trade) I chose to use Interactive Brokers as my brokerage account and limit my commission to $1.5 per trade.

It's true that they aren't the most "user friendly" brokerage out there but they make sure the job is done right.

[twil]

I us TDA they are $9.99 per trade. I make sure the cost is less than 1% of my total purchase($1000+).

[crimsonghost747]

Nowadays it's quite easy to change brokers, as long as the person is fluent in English there are so many options available. I've always thought that as long as the commission is less than 1% then I'm alright with it, but of course the less I pay the better. I'm currently with IB because just like daat99 I too got sick of the local brokers charging an arm and a leg for transactions... especially if I wanted to buy from North America.

My old broker had a minimum of 20 euros commission when buying from the USA...thus I never bought from there. Now I'm with IB and I think I paid $0.36 commission for my last trade.

[hendi_alex]

Actually prices at TDA are negotiable. They will cut to $7.00 if you tell them you will switch to Scottrade which sports that trading fee. I did that several years and hundreds of trades ago. I know some investors with bigger, more active accounts who negotiated much loer fees at TDA.

[Jago]

Maybe it's just me, but I think that as long as you aren't paying 10$ or more per trade, the importance of transaction costs is utterly dwarfed by the rationality of your buying and selling decisions. Think about it: a 10$ comission on a 500$ purchase is 2%, but while it's nice to keep your costs low, the difference between getting a 6% vs a 8% vs a 10% annuall return over the next 10-20-30 years is going to render it completely meaningless.

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. It's very easy to have a few poor performers that wreck a portfolio completely dissuade a beginning investor from continuing to invest any money AT ALL. I almost fell into this trap myself.

Of course, everything can be taken too far, if you have $20k spread between 50 stocks, it most likely means that you are buying things left and right without performing any significant due diligence "just to be sure" and if you aren't willing to spend the time to do research, you really should buy that Vanguard ETF instead and spend your time on something you deem more pleasant.

[crimsonghost747]

(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.