Ask Mike:
What's the best way to follow TurnerTrends with $42,000?

Question:

Frank from Denver, writes:

I only have $42,000 to put into the market. How would you use the $42,000 to get the best exposure to the ETF Total Return Portfolio, Growth-30 and Market Trend portfolios?

Thanks,

Frank

Mike's Response:

Hi Frank,

Assuming you like the profile of the portfolios, the biggest issue you need to consider is the net impact of the cost of trades on your total return.

Here is a simple example: Suppose you were going to buy 300 shares of a $20 stock. The cost of the shares is $20 x 300 or $6,000. Let's say the brokerage fee is $10 (to keep the math simple). So, the net cost of the trade, on a percentage basis, is $10 divided by $6,000, which is only 0.17%. That's pretty insignificant.

Now, let's say you are only going to buy 10 shares of the same $20 stock. The total cost of the shares is $20 x 10 or $200. You will still have to pay the same brokerage fee of $10. But, now the net cost of the trade is $10 divided by $200, which is a whopping 5%. That's 29 times more expensive.

Let's now assume the market is strong and that I am fully invested in all 3 portfolios. That would be 5 stocks in the ETF Total Return Portfolio, 30 stocks in the Growth-30 and 30 stocks in the Market Trend. If you follow my rules of asset allocation, you will be buying an equal amount in each trade. That works out to be about 1.5% of your total investment basis in each trade.

1.5% of $42,000 is $630. A $10 transaction fee ($5 to buy and $5 to sell) on a $630 investment is only about 1.6%... but follow me on how that 1.6% can eat you alive...

The ETF Total Return Portfolio will make about 4 to 6 round trips per year. Using 5 as the number, that means we will make 5 x 5 or 25 total trades. $10 x 25 is a total of $250 in round-trip trading fees for the ETF Total Return Portfolio. But... that's the easy one.

For the Growth-30, we will make an average of 2 to 4 trades per week. Let's average that out at 3 trades x 52 weeks for a total of 156 trades, which is a total brokerage fee cost of $1,560.

For the Market Trend, we will make about twice the number of trades as the Growth-30. So, the brokerage fees for the Market Trend amounts to about $3,000.

Therefore, if your $42,000 is fully invested in all 3 portfolios, you will be spending about $5,000 per year just in brokerage fees. That $5,000 equates to about 12%. That means these portfolios will have to generate more than 12% just to break even.

So... what can you to do to decrease the net cost of brokerage fees? There are really only two choices. Either increase your investment amount or decrease the number of trades per year. Think about it... if you invested $80,000 instead of $40,000, your trading fees would be cut in half, on a percentage basis. It doesn't take long to get those fees down to a livable amount. In my portfolios, I like to keep the total cost of trading fees to 2% or less.

If you don't have the option of using a larger investment basis, then I would seriously recommend that you consider only one of the portfolios, instead of all 3. If you went with the Growth-30, you would cut your trading fees down by nearly two-thirds. Drop down to the ETF Total Return Portfolio only and your trading fees become virtually negligible. The downside of putting all of your investment into only 5 positions might not be to liking, though.

But, now you have the tools to work with to determine which of the TurnerTrends portfolios you want to follow. It is a function of 3 variables:

1. Total investment basis
2. Total number of trades per year per position
3. And, total number of positions

Thanks for the great question. I look forward to hearing back from you on what you decide.

Regards,

Mike