Investing For Growth
Investing For Growth
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(FOOL GLOBAL WIRE) LEXINGTON, KY. (October 22): DIGITAL EQUIPMENT posted a surprising loss this morning and tech stocks suffered all day as a result. You know what that means: IFG takes it on the chin again. There wasn't any news on the IFG holdings today, though, so I'll use this space to go over an issue about my growth models that came up in last night's Coliseum event.
Just how much money does one need to use these models? The answer, of course, depends greatly on how much you pay per trade. I've always maintained that if you're making your own decisions about what to buy and sell, or are using a mechanical approach like Beating the Dow or Investing for Growth, there's absolutely no reason to pay more than $20 per trade.
With deep-discount brokers offering commissions as low as $12 per trade, regardless of size or price, the individual investor is giving away money needlessly by paying much more than that.
Find the lowest-priced broker you can deal with given your ability to trade via the Internet or telephone and don't pay high commissions for services you don't need. If you need the services offered by discount and full-service houses, then you have to swallow their much higher costs. But if you're just using your broker to execute orders based on your decisions, stop paying for their managers' yachts and their fancy new buildings.
All that said, let's look at IFG's typical trading costs. The original IFG 10-stock model averages approximately 40 trades per year (roughly half the holdings turn over each quarter). At $12 per trade, a typical year would cost you $480 in commissions. At $25 per trade, that's $1,000 a year in trading costs.
Our guideline is that you should strive to keep annual trading costs under 2.5% of your portfolio's total value. At an annual cost of $480, that means you must have at least $19,200 invested in IFG stocks for the costs to be reasonable. At $1,000 in costs (at $25 a trade), suddenly you need $40,000 to keep commissions within our recommended limits.
If you're using the newer Unemotional Growth model, even with the five-stock approach, the trading costs are about the same. It's possible that all five stocks could turn over each quarter, so the total trades per year could go as high as 40. If you update and re-balance monthly, the total will be even higher.
The point of all this is to match your strategies to your own portfolio needs. If the costs associated with 40 trades per year would cripple your portfolio, stick with Beating the Dow for a few more years while you build up your portfolio. That's anything but a losing proposition. If you're on the borderline and can afford the costs associated with updating a growth-stock model quarterly, but not monthly, accept the slightly less aggressive cycle to keep costs in line and then gradually shorten your cycle towards one month as your portfolio grows. In other words, be flexible enough to choose the right combination approach for you. Understanding the needs of your own situation is half the Foolish battle. Transmitted: 10/22/96 |
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