Making decisions in an all-or-nothing way keeps things simple, but it limits your options. By keeping your mind open to other possibilities, you can sometimes find more creative solutions that work better.
For instance, if you follow Berkshire Hathaway
Solving the housing crisis?
I just heard about an idea that applies the same concept to the housing market: fractional home ownership. That might conjure images of vacation time shares (which is yet another fractional ownership solution), where you don't own a whole vacation home, but instead get to share in the use of many. But this particular idea is rather different.
John O'Brien of Berkeley's Haas School of Business explained the concept in a recent article. He cited a hypothetical homebuyer who wants to buy a $300,000 home, but can only afford $240,000. Rather than stretching to get an unaffordable, risky mortgage -- the only option available in an all-or-nothing scenario -- the creative alternative involves getting an outside passive equity investor to buy a 20% interest in the home. This lets the homebuyer live in the home without having the full investment risk of falling home prices. It also creates a new market for interested real-estate investors.
The idea of fractional home ownership has been raised by Fed Chairman Ben Bernanke and other financial and economic thinkers. The concept tries to change the status quo, where we either rent or own our homes. Given how hard it is for many people to move from renting to owning without stretching their finances, the idea is worth pursuing.
Drips and funds
At the other end of the spectrum, sometimes fractional shares of property are more about convenience than affordability. Consider dividend reinvestment plans, or direct stock purchase plans, which are often referred to as "Drips." (These investing vehicles are so powerful that they're Step 5 of our 13 Steps of Investing Foolishly.) With Drips, you can invest in a host of major American companies directly, bypassing brokerages and the commissions they charge. Instead, you typically pay a modest fee and can invest small amounts regularly, even if it means buying less than a full share of stock at a time.
Here are a few well-known companies that offer Drip plans:
Company |
New Account Minimum 1-Time Purchase |
New Account Minimum for Automatic Investment |
---|---|---|
Intel |
$250 |
$50 |
Walgreen |
$250 |
$50 |
Wal-Mart |
$250 |
$25 |
Yahoo! |
$250 |
N/A |
Verizon |
$250 |
$50 |
Qualcomm |
$500 |
$50 |
Nokia |
$250 |
$50 |
Nike |
$500 |
$50 |
Data: Computershare.com.
The ability to buy fractions of shares is one benefit of Drip investing. Getting your dividends reinvested is another, since plowing your gains into new shares of stock, which in turn generate their own dividend payments, can really turbocharge your returns. In addition, the low cost of investing this way means you can invest small sums regularly, if that's what's best for you.
One caveat for prospective Drip investors: For tax purposes, you'll have to keep good records of all the shares and fractions of shares that you buy.
And if you're not a Drip...
There are a few other ways to start reinvesting your dividends. You may find that your brokerage will reinvest your dividends for you. If it won't, follow my lead: I let my dividend income accumulate in my brokerage account, and now and then, I will spend that growing sum on whatever stock seems most compelling at the time.
Mutual funds offer another example of fractional ownership. You probably can't afford to buy shares of all 500 companies in the S&P 500, but by investing in an S&P 500 index funds, you'll own fractions of each of them. And with any other fund, your dollars will be distributed among all the fund's holdings.
Always look outside the box for better alternatives. By going beyond all-or-nothing solutions, you'll open up new horizons that can improve your finances.
Read more on how to deal with today's challenging stock markets:
- Why you shouldn't listen to Jim Cramer.
- This mistake could cost you a fortune.
- Our experts like these 3 cheap stocks.