It wasn’t very long ago when I decided to take all my money out of my mutual and index funds and put it towards individual stocks.
However, now that I have a little more experience in managing my own stock portfolio, I have begun to second guess that decision. I am starting to think that I may have underestimated the power of index investing by dismissing it too rashly.
I have learned that at my financial stage, moving away from index investing would not be the smartest move. As a result, I have reallocated some of my funds back into index funds. Here are the reasons why.
Easier to Manage
The most obvious advantage to index investing is the convenience of having a lot of stocks in one category. If you’re anything like me, it will bring you great relief of not having to check how each and every one of your stock is performing all day long.
This borderline obsessive compulsion can bring you quite a lot of unwanted stress. Trust me I know!
Taking into Account the Commission Fees
After having experimented with both index funds and stocks, I have noticed that the commission fees for trading stocks can get quite expensive.
Each buy and sell transaction will most likely cost around $9.99 with most discount brokerage account hosted by a reputable bank. This means that to profit, my stock will need to have make $20 in growth.
To most people, this amount may not seem significant. However, I was new to investing and I only had $10,000 in my discount brokerage account as mentioned in my net-worth report. I was bound to make a newbie mistake at some point.
My First Newbie Mistake
Just a couple of weeks ago, I had spent $10 to purchase one stock from Google which cost over 10% of my total funds. As promising as a stock from Google is, I am relying on one share to profit more than $20.
In fact, many people would argue that it was the perfect time to purchase shares from Google. Considering how the value price has dropped significantly, the purchase was at a discount. How my share will perform after the Google stock split is another question.
Regardless of how you see it, this story may have turned out differently if I had more money to purchase more than one share. As it stands, I was playing with stocks way above my league. But what’s done is done. I will hold onto this share for the time being.
Index Investing for Smaller Accounts
This mistake would have never happened if I had never bought out of my index funds. I have learned that it is much easier to yield higher returns through index investing for someone who doesn’t have much money in their account.
Another advantage to investing in index funds is that I can still get a stake in the big players without having to pay the full stock price. For example, Google has joined the S and P 500 and all I have to do is to find an Index that is heavily focused on Google.
Before choosing the right index to invest in, do remember to take note of the management fee (MER). From my research, TD offers the lowest MER to its investors. However, unlike its competitors, this low rate comes with a catch. If you withdraw your funds within a 30 day holding period, you are subjected to a withdrawal fee.
My Ideal Portfolio
In terms of where I stand now, my game plan is to configure 70% of my total funds in indexes and the other 30% in stocks for experimenting. I believe that this ratio would help me reap the benefits of index investing while at the same time give me opportunity to advance my knowledge in trading stocks.
What are your thoughts about all of this? I would love to hear from you.
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