Ask Mike:
How do I pick the right portfolio based on the frequency of trading?

Question:

Hello Mike,

I heard you on the radio and after listening to you, subscribed to your ETF Total Return model portfolio and the Market Trend model portfolio.

I have a question pertaining to stock trading amounts. I only have a fairly limited amount of cash to invest and my trades cost me $7.00 per transaction.

Based on the two model portfolios, I am concerned that with the frequency of your trades and the number of positions, my return will be significantly less than, say, an investor with a million dollars following these two portfolios.

Do you have any advice that can help me keep my trading fees low enough to not adversely impact my rate of return?

Thanks,

David K, Port Saint Luci, FL

Mike's Response:

Hi David,

Thank you for subscribing and for listening to my show, 'Investing Conservatively'.

You are very wise to consider the number of positions and frequency of trading when calculating your net total return. I know of investors who have learned the hard way that trading fees can more than totally consume your profits if you have too little money chasing too many trades.

Here are some guidelines that will help you in your return analysis:

1. The Market Trend model portfolio has a maximum of 30 positions. I try to keep all my portfolios fully invested most of the time. This portfolio will make 3-to-4 trades every week. At an average cost of $7.00 per trade, here would be the impact on several different investment amounts.
• For a $1 million investment basis, the net cost for the year would be about 0.2%.
• For a $500,000 investment basis, this cost would be about 0.4%... still very inexpensive.
• For a $100,000 investment basis, the same number of trades, will now cost you about 2% of your profit.
• For a $50,000 investment basis, that number goes to 4%. This means you have to earn 4% just to break even.
• At a $20,000 investment basis, you would have to earn nearly 11% in profits just to pay for the cost of the trades.

This is why I have a minimum recommended investment basis for each of my model portfolios. To follow the Market Trend model portfolio with less than a $40,000 to $50,000 minimum investment basis, would just put too high of a threshold to cross for generating substantial returns.

2. For the ETF Total Return model portfolio, I have a maximum of 10 positions. This portfolio only trades about once every 2-3 weeks. Again, based on $7.00 trades, here is how this portfolio would generate trading fees as a percentage of your total investment basis:
• For a $1 million investment basis, the cost would only be 0.003%.
• For a $100,000 investment basis, that cost only gets to 0.3% still almost a negligible amount.
• For a $30,000 investment basis, the cost is only 1%.
• And, for a $10,000 investment basis, the cost is still reasonable at only 3%.

Be sure to read my 'Recommended Investment Basis' section for both of these portfolios on my website. Then, do the math with your investment basis and see how much the trading fees are going to cost you.

Personally, I don't like to let trading fees get higher than about 2% to 3% of my total investment basis.

Thanks for the email.

Regards,

Mike