Rational share strategy

Radiantsoul

I am not sure that costs of trading are ever really immaterial though. Bid-offer spreads, dealing fees and stamp duty are going to make too much trading an expensive hobby.

marathonic

Radiantsoul wrote: »

I am not sure that costs of trading are ever really immaterial though. Bid-offer spreads, dealing fees and stamp duty are going to make too much trading an expensive hobby.

Bid-offer spreads are mainly applicable to funds. In medium-high cap shares, they should be negligable.

Dealing fees, like I say above, can be fixed for up to 90 trades -per year (assuming 12 monthly forex trades and dealing is US quoted stocks - or, indeed, 12 monthly UK share purchases).

Stamp Duty: An issue with UK and Irish shares - not an issue with US shares.

For anyone that's interested in the tax situation on US shares regarding dividends, foreign nationals fill out a form with Interactive Brokers which reduces the US Dividend Witholding Tax to 15% and you get a credit for that 15% on your tax return here.

Capital Gains will be treated as any other capital gains are - including a CGT free allowance.

IronWolf

marathonic wrote: »

But if fees were so low that it would be feasible to switch from a stock at a level at which you would consider "fair value" to another stock which you would feel is undervalued, would that not make sense?

In doing so, you'd lock in a gain, using some of that years CGT tax-free allowance and you'd then be in a better value stock.

Say, for example, you were investing in US stocks via Interactive Brokers, your $10 monthly fee includes 10 trades (well, if you do a foreign exchange that month from GBP to USD, it'll allow you an additional 7 trades given the $2.50 cost of the forex trade).

Therefore, you could actually consider there to be NO fees for switching - as they're included in your minimum commission.

The Interactive Brokers annual minimum commission of $120 represents a 1% annual cost on a $12,000 portfolio and allows 12 monthly forex trades and 90 annual stock trades if investing in US quoted stocks.

This is what drew me to Interactive Brokers a few years ago.

Yes if I found a better, undervalued stock I would switch, but so far I just dont get enough great ideas to do that, plus the constant cash flow coming in from my saving money each month means Im never short of cash that needs putting somewhere

marathonic

IronWolf wrote: »

Yes if I found a better, undervalued stock I would switch, but so far I just dont get enough great ideas to do that, plus the constant cash flow coming in from my saving money each month means Im never short of cash that needs putting somewhere

Savings are non-existent for me having recently bought a house. Just working on getting an emergency fund set up again before venturing back into the world of investment.

I'm keeping my Interactive Brokers account open though.

I always like the idea of the 90 trades per year being already covered by the minimum commission. That's an average of 7.5 per month meaning that, if you're investing £700 per month, you can allocate £100 to each of 7 stocks without worrying about trading fees.

grey_gym_sock

marathonic wrote: »

I always like the idea of the 90 trades per year being already covered by the minimum commission. That's an average of 7.5 per month meaning that, if you're investing £700 per month, you can allocate £100 to each of 7 stocks without worrying about trading fees.

but haven't you paid about 1% in of what you're investing in commission?

marathonic

grey_gym_sock wrote: »

but haven't you paid about 1% in of what you're investing in commission?

Assuming I have the equivelant of $12,000 invested, then yes. When that grows to $24,000, the minimum commission represents 0.5% of total investment and so on.

I guess what I'm getting at is that, with a $12,000 investment, you cannot diversify through investment in single shares with most UK based stockbrokers.

Take the OP for example, a trade costs £12.95 which means that the initial set-up of a portfolio with 7 stocks costs more than setting up a portfolio of 7 stocks with Interactive Brokers and making a further 7 trades in US stocks every month for the entire year.

With the £12.95 trade cost, it's difficult to split any additional monthly investment between multiple stocks - a problem I've never had with Interactive Brokers.

Another way of thinking about it is "I have 7 trades per month and a single forex trade. If I decide to go over that, only then do I need to start thinking about costs".

A 1% annual cost, based on a $12,000 portfolio, is similar to what a lot of people pay for a fund - but with the fun of managing your own portfolio

grey_gym_sock

marathonic wrote: »

A 1% annual cost, based on a $12,000 portfolio, is similar to what a lot of people pay for a fund

and a lot more than you'd pay for a tracker.

but this is 1% initial charge. what's your average holding period? e.g. if it's 2 years then, when you also count selling commission, it would really be 1% per year. longer holding periods would make it lower, or shorter holding periods would make it higher.

there are also extra costs if you wanted to wind down your IB account, as they continue charging their minimum though you wouldn't be using all the commissions you'd paid for.

marathonic

grey_gym_sock wrote: »

and a lot more than you'd pay for a tracker.

but this is 1% initial charge. what's your average holding period? e.g. if it's 2 years then, when you also count selling commission, it would really be 1% per year. longer holding periods would make it lower, or shorter holding periods would make it higher.

there are also extra costs if you wanted to wind down your IB account, as they continue charging their minimum though you wouldn't be using all the commissions you'd paid for.

It depends on how many trades you make to set it up and wind it down. If you invested $12,000 split amogst 7 shares and held for 3 months before closing down your account completely, your total commissions would be $10 * 3 = $30 (or 0.33%).

If your total invested was a constant $12,000, your minimum commission would remain a constant 1% annually.

It's not a 1% initial charge as such - the initial charge is your $10 monthly minimum commission. Each subsequent month, you're charged another $10 and can, if you choose to do so, make up to that values worth of trades.

Ideally, your portfolio would increase in size over time. If I had a $60,000 portfolio (a bit over £40,000), the annual commission would be 0.2% and still allow 90 US trades and 12 Forex trades annually.

Radiantsoul

marathonic wrote: »

Bid-offer spreads are mainly applicable to funds. In medium-high cap shares, they should be negligable.

I think it is going to add up though. If you are trading ten times a month then a spread of 0.1% is going to add up to 1%. The spread might be smaller and you might not trade the whole value of your portfolio ten times per month, but it is still expensive.

marathonic

Radiantsoul wrote: »

I think it is going to add up though. If you are trading ten times a month then a spread of 0.1% is going to add up to 1%. The spread might be smaller and you might not trade the whole value of your portfolio ten times per month, but it is still expensive.

I suppose that would be true for some companies. For most S&P 500 quoted stocks, I would expect the spread to be $0.01 which, assuming your average $40.00 stock, represents a spread of 0.025%.

Also, as you say, you're not going to be turning over your entire portfolio monthly, or even annually.

When I was saving for my house deposit, I had a portfolio in the region of $42,000 split among 12-15 companies. On rare occassions, I'd sell an entire holding but, most of the time, I'd lodge my monthly investment and select a few of those 12-15 companies to add to.