“I’ve often read and thought about this but how does one exactly do this? Lets say I put $200/month into my IRA. Do I think buy $200 worth of stock that I already own, new stock, or both? Also how do you feel about the transaction fee? Sometimes I feel as if it’s better to save until I have more and then buy a larger amount of shares.
I’d love your insight! Thanks!”
First of all thanks for the great question. I feel like I can give you some helpful perspective on this.
For the Sather Research eLetter portfolio, I put $150 a month into a Roth IRA. Each month contains a new stock pick for the $150. The way that this money works in the portfolio is to create a new position every month.
The reason for this is because I just started this automated system last October. With it being close to the end of January now, the portfolio only holds 4 positions, one for each month. Obviously this is much lower than the recommended diversification of 10 – 20 stocks, and so it makes sense to add a new position every month.
Your situation might be different depending on what your portfolio looks like. Once optimal diversification is met, at that point I will probably evaluate every stock in my portfolio and either add more, or invest in a better opportunity. Basically what I am saying is to automatically add new positions until diversified, and then invest based on best opportunity.
As far as the transaction fee, you are right to be concerned. This is a big reason why I advocate TradeKing. The difference between a transaction fee of $4.95 vs. $6.95 might not be that much, but consider how much it could eat into your return. With a $200 investment, the higher $6.95 fee gives you a 3.5% loss right off the bat. The lower $4.95 transaction fee with TradeKing is a full percentage point less at 2.5%.
The difference between even 1% in a long term and compounding return can become very significant. So it’s good to minimize this as much as we can. Over a 12 month period using your example contribution, we’ve already saved ourselves 12% by going with TradeKing over a different broker.
Transaction Fee Concerns
My feelings on the transaction fee are mixed. I feel that it’s a personal decision about how much loss you are willing to take upfront. Obviously with the Sather Research eLetter, I’m losing out on 3.3% every trade by only investing $150 a month. At the same time I feel like $150 a month is doable for a lot of people and a very inspiring goal to shoot for.
Because the way I invest is very risk averse and tends to lead to long term holding periods, the 3% loss upfront is acceptable. A decent dividend payer will make that up in a year with the dividend alone, and I’m confident in my stock picking enough to compensate for this loss. I know I could be optimizing for more gains but for me it’s all about encouraging people to invest.
Everyone will be different depending on their strategy, goals, and financial situation. Maximizing gains could possibly mean saving up more and investing later, but then you have to consider potential loss of upside and missed dividend payments. Again, this is all subjective and it’s impossible to know if a stock will go up or down tomorrow.
A great way to maybe mitigate this is to check ex-div. dates on stocks you wanted to purchase. The ex-div date is just the day you must own a stock by in order to receive its upcoming quarterly payment. (Note: You must buy the stock on a day BEFORE its ex-div date to receive dividend). If you do decide to go this route be sure you are still saving the same amount every month, to stay consistent and still see the positive benefits of dollar cost averaging.
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**Q&A about Transaction Fee and $200 a month IRA Contribution**