Small Dollar Investing In The Stock Market
All empirical studies show that to properly diversify, in the stock market, one needs to own a minimum of 15 stocks. These 15 stocks need to be spread across at least 5 different industries. Also, your purchase should be a round lot, or, 100 shares of each stock.
When you multiply the minimum number of shares required (100), times price per share, times 15 stocks it can amount to over $50,000 just for a stock portfolio. In addition, other studies show that of the 158 asset classes available (domestic stocks are one asset class) an “average” investor needs to be in at least 7-9 asset classes. If you monetarily diversify equally across all classes, one needs about $350,000-$450,000 (7-9 classes times $50,000) to diversify and reduce risk.
If you plan to invest in individual stocks, one should devote at least 15 hours of initial research for each stock. Plus, one should put a minimum of 5 hours per month of continuous research for each stock in your portfolio.
Some people have the above investment dollar amounts. Some do not. Some have the knowledge and business acumen to do the research. Some do not. What alternatives are available to you if you do not have the time, knowledge or money?
If you do not have the time, knowledge or money to buy individual stocks, should you still make individual purchases? The answer, from the old Henny Youngman joke line…A guy goes into a doctor and says…when I raise my arm over my head it hurts…what should I do Doc? Doc says…don’t do that! (ba da-bing!) If you do not have the time, knowledge or money to buy individual stocks…Don’t do that! Here are some alternatives to your investing quagmire!
1. Make use of mutual funds: For as little as $100 to $500 initial investment (or monthly investments of $50) you can get the best minds and research teams doing all the leg work for you. You can invest across a broad spectrum of investment categories that diversify all over the world. Some mutual fund categories are called “All Asset” funds and have 6-10 asset classes for you to diversify within. Or, another route, for a total of $1,000-$5,000, you personally could choose 10 different mutual funds that are in 10 different asset classes to get the same mix. Research before investing in mutual funds can be as little as 1 hour for each fund. Ongoing research should be 1 hour per fund per month.
2. Exchange Traded Funds (ETF). A simple explanation is that these are “like” mutual funds but trade like stocks. That is, mutual funds that you buy or sell are priced at the end of each day. ETF’s are a basket of stocks (or bonds or whatever) that have the diversification of mutual funds, but, trade instantaneously just like stocks. You can buy as few as 1 share, or more, if your funds allow. Trade costs are very reasonable. Again, you can diversify across many asset classes very inexpensively (The ETF’s are also known as “I” shares).
3. Foliofn (www.foliofn.com) allows you to trade a basket of stocks on a dollar basis (say $1,000) rather than a share basis. Thus, you are not forced to buy 100 shares to get the best price. Users pay a monthly fee from $19.95 to $39.95 and can customize any portfolio to meet preferences. This is for the investor who wants to do some research on their own.
These are three alternatives for you. There are many more. I have found that for portfolios of up to $100,000 the above three are a good starting point.