This one’s straight from our Stock Advisor discussion boards:
How do I build a stock portfolio with limited funds?
In this case, the investor is 25, has read through our 13 Steps to Investing Foolishly, and is able to invest $700 to $1,000 a month.
“It seems almost counterproductive to buy the [Stock Advisor] Starter Stocks. Buying one share of Chipotle Mexican Grill per month will make diversification an arduous task,” the member wrote. “The value of my purchases are further reduced when you add the $7-$10 trading fees.”
Should he make small-quantity buys of the Starter Stocks, store the money until he can buy in bulk, or invest in riskier, low-priced stocks?
Motley Fool analyst Alex Scherer had the answer.
Building a stock portfolio
“Let’s walk through it: $700 per month for 12 months means $8,400 to invest in just the first year, and $42,000 in capital to invest over your first five years, at which point you’ll be 30 years old,” Alex wrote.
“If you wanted to start investing regularly, on a monthly program for instance, you’d perhaps make two transactions per month of $350 each. At that level of individual trade, a $10 commission is starting to look pricey (2.8% of your investable cash per trade); [with] a $7 fee, that’d be more within the parameters we suggest of no more than 2% fees for trading.
“If that’s cutting it too close for your tastes, perhaps you’d want to make a single transaction per month, or perhaps you’d save up cash over a two- or three-month period and make a few $500 or so quarterly investments rather than monthly investments,” he continued. “Four new purchases per quarter would give you ~$500 in each of 16 companies by the time you’ve finished your first year. That’s a nicely diversified $8,000 portfolio for a 26-year-old! (Or for anybody, for that matter!) Keep up that pace, and by the time you are 30 you’ll have a chance to investigate owning dozens and dozens of companies, probably find a few favorites that you’ll invest in multiple times, and build up larger stakes over time (see Buying in Thirds), and still have dozens of total holdings besides.
“Either way, what is important is to get started, get on a regular schedule, and allow that regular investing to build up over time, such that five years down the road you have saved up and invested those funds you think ought to be dedicated to investing,” Alex wrote. “It seems futile now, since you are looking at dollar 1 and wondering what the point of it is. But that feeling should pass soon enough, after you have 5, 10, 15 purchases under your belt and suddenly you see you’ve got a nice diversified portfolio of businesses you’re probably comfortable holding for the next 40 years. And with that base, you may find at age 27 or 28 or 30 that you’re more confident and way ahead of the game on the road to retirement/kids’ college funds/etc.”
No value in ‘cheap stocks’
As for whether the member should look at penny stocks because they’re “cheaper,” Alex offered a word of warning.
“Please, please understand that what matters is
- the $$$ you have invested in a company, not the number of shares those $$ can buy, and
- the business results of the company.
“Consider the following: my daughter wanted to invest in Apple [in 2014], so we purchased 1 share of the company around $100. Apple has increased in value about 25% since then, so that 1 share is worth $125,” Alex wrote. “If Apple had split its stock 100-for-1 before we bought, then she would have owned 100 shares of Apple at $1 each… but today those shares would be $1.25 each, giving her the exact same $25 (and 25%) profit as she has today owning just 1 share.”
Click the link for more discussion on the topic of low-priced stocks.
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