In this segment from Rule Breaker Investing, Motley Fool co-founder David Gardner digs into the question of how much money a person ought to have at hand each time they add to their portfolio. The fee structure of your brokerage will have an impact on the specific answer, but given the existence of extremely low cost-per-trade options, most investors should be able to handle those monthly purchases.
The reasons he feels it’s a wise idea to invest regularly, frequently, and with smaller amounts, however, isn’t just a matter of dollar-cost averaging or developing a good investing habit. It also keeps you from falling prey to some of investing’s emotional pitfalls.
A full transcript follows the video.
This video was recorded on May 31, 2017.
David Gardner: “Hey, there, my name is Jeff Pugh,” Jeff writes, “I’m a 31-year-old actor living in New York City. I’m a Stock Advisor subscriber and an avid listener of all Motley Fool podcasts. Love the show.
“Question. I’m new to investing. I’m working with a small amount of cash. What I’ve been doing is investing in some of my favorite stock picks from Stock Advisor, as I’m able to, on about a once-a-month basis. $500 here, $1000 there. Is it OK to continually add to my existing stocks in my portfolio, or is it better to save up a larger sum of cash and make a bigger purchase all at once? Thanks. Love the show. All the great insight from Rule Breakers and all The Fool podcasts.” Jeff.
Jeff, thank you for a great question [and] I think a question that’s on a lot of people’s minds. That’s why I’m more than pleased to address it this week. And I’m going to come down solidly on the side of yeah, $500 here, $1000 there. I love the idea of being regular. Small. Sometimes less small. Sometimes larger sums of money, but just invest when you can.
And here’s why. First of all, these days if you have the right brokerage account — and there are a number of online brokers, in particular, that allow you to buy fractional shares, or have very low commissions. If, by the way, that is not your case, then it does make sense to save up money and do a little bit more of a lump sum if you’re getting nickeled and dimed to death on commissions.
But if you’re using something like Robinhood or ShareBuilder — which is no longer an independent company but was bought out — … if you have that kind of a framework, where you can invest cheaply anytime you’re ready, I so favor that because the opposite is to load it up.
The opposite is to dial up a big bunch of dollars and feel like you’re making a big decision. And I think that’s when emotions can sometimes play against us. When sometimes we can be a little bit more reluctant even to invest. With a larger sum you might think, “Should I get in now? I mean, wow, the market’s been so strong over the last six months. Maybe I should wait.”
And I think you’re much less likely to fall into what I think of as a mental trap, which is what I think that is. I think you’re much less likely to fall into that mental trap when you just make it an everyday thing, or an every week thing, or every two weeks, whatever the sum of money. It also is going to make you sit up and pay more attention to your stocks, and to think about where you want to place that $500 or that $1000 this time.
And, you know, our ideas change as we go. You’re a Stock Advisor subscriber, so you know that we come up with a few ideas every month. We have our Best Buys Now. We have my new pick, my brother’s new pick. We have a lot of ideas for you, so your ideas may change over time, and it’s just going to be more efficient, I think, to deploy money when you have it. Hope that makes sense.
Final point I’ll make, here, is if you do the math of it, the earlier you deploy any dollar into the stock market, net net, the better off you will be. And why is that? Because the stock market tends to go up. Therefore, if you tend to wait, and let’s say put together a big lump sum, you’ve kept that money out of the market and again, the stock market tends to rise 10% a year. We all know it goes down dramatically sometimes. But over the course of time, on any given day, it should be rising a little bit. So the longer you wait to put any dollar at work for you, the less that dollar will do for you down the road. Thanks, Jeff.
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