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For new investors, buying stocks and getting into the market can be a bit daunting. In this segment of “Ask Us Anything” on Motley Fool Live, recorded on Feb. 28, Fool.com contributors Demitri Kalogeropoulos and Dan Caplinger answer a member’s question about how to build a portfolio.
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Demitri Kalogeropoulos: As you mentioned, there’s a wide range there in terms of what kind of portfolio you want to have. But a good rule of thumb that I had heard is in terms of transaction costs, you want to keep your fees in general around 2% or less, I would say in a purchase. Just to put some numbers on that, for example, if you’re paying $10 for the purchase, that would put you at about $500 initial investment and you’d be paying 2% there.
But a lot of brokers, those numbers have come down a lot and it’s not too hard to find brokers that don’t charge anything. I have three accounts, I don’t think that I pay any transaction costs. That’s the only hard number I would steer away from. It can be difficult if you’re making like $100 purchase and you’re paying somewhere in that $10 range for transaction fees. You’re starting off with a 10% in the hole there, so I would avoid that.
But otherwise, I wouldn’t think there’d be any minimum. What you can do, I like to do consistent purchasing once a month or every couple of months, or whatever you can do, try to get in that habit and don’t be afraid to make a small initial purchase and buy a stock over time.
I know a stock advisor and some other places have talked about buying in thirds, I like doing that myself by making an initial purchase and then it can be small, and watch that company for a quarter or so and then maybe buy again. Those are just a couple of good strategies, but way to go.
Dan Caplinger: It’s amazing to me just how much of that answer has changed over time. It used to be when you were dealing with even a 995 stock commission, it really imposes a pretty high minimum on getting yourself a diversified portfolio.
Now that you’ve got zero commission plus availability fractional shares plus all kinds of things that really is geared toward the smaller investor right now. You can get started with a diversified portfolio so much more easily than you used to have to jump through a whole bunch of bells and whistles in order to find workarounds, to get yourself diversification.
Even then, like Demitri was going through with the math, you still had to do the math and figure out, am I blowing too much of my investment capital upfront on expenses, so much that even if I perform well and beat the market, that I’m still not going to end up ahead because basically, my broker made more money off me than I made for myself? It is the positive end of what we’ve seen in the brokerage community and so I think that’s a really good thing.
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