How often to add more shares to your investment portfolio is one of the first things an investor might wonder.
You have therefore made the decision to begin your journey into personal investing. You’ve saved up some cash to invest in the stock market, done some research, and chosen a few shares to purchase.
Naturally, one of the first things you might want to know is how often you should add new stocks to your portfolio.
The frequency of buying shares or investing in general, is a crucial question for all investors regardless of their experience level. While some advocate for frequent trading, others emphasize the benefits of a long-term buy-and-hold approach. This guide will explore both perspectives, providing insights into the optimal frequency for buying shares based on your individual circumstances and investment goals.
Understanding the Buy-and-Hold Approach
The buy-and-hold approach is a long-term investment strategy that involves purchasing shares and holding them for an extended period, typically five years or more. This approach is based on the belief that the stock market, over time, tends to trend upwards despite short-term fluctuations.
Benefits of Buy-and-Hold:
- Reduced Transaction Costs: Frequent trading incurs higher transaction costs, including commissions, fees, and bid-ask spreads. Buy-and-hold minimizes these costs, allowing you to retain more of your investment returns.
- Reduced Emotional Influence: Frequent trading can be driven by emotions like fear and greed, leading to impulsive decisions that may not be in your best interests. Buy-and-hold encourages a more disciplined approach, reducing the impact of emotions on your investment choices.
- Time Diversification: By investing over time, you spread your risk across different market conditions, reducing the impact of short-term market fluctuations. This strategy allows you to ride out market downturns and benefit from long-term market growth.
The Case for Frequent Trading
While the buy-and-hold approach offers significant benefits, there are instances where frequent trading may be appropriate. This is particularly true for investors with a high-risk tolerance and a deep understanding of the market.
Benefits of Frequent Trading:
- Potential for Higher Returns: Active traders may identify and capitalize on short-term market movements, potentially generating higher returns than a passive buy-and-hold approach.
- Hedging Against Risk: Frequent trading allows investors to implement hedging strategies to mitigate potential losses during market downturns.
- Tax Optimization: In some cases, frequent trading can be used to strategically manage capital gains and losses for tax optimization purposes.
Factors to Consider When Determining Your Investment Frequency
Several factors should be considered when determining the optimal frequency for buying shares:
- Investment Goals: Your investment goals should guide your investment frequency. If your goal is long-term wealth accumulation, a buy-and-hold approach may be suitable. If your goal is to generate short-term income, frequent trading may be more appropriate.
- Risk Tolerance: Your risk tolerance plays a significant role in determining your investment frequency. If you have a high-risk tolerance, you may be comfortable with frequent trading. If you have a low-risk tolerance, a buy-and-hold approach may be more suitable.
- Market Knowledge and Experience: Frequent trading requires a deep understanding of the market and significant experience in identifying and analyzing investment opportunities. If you lack this knowledge and experience, a buy-and-hold approach may be a safer option.
- Time Commitment: Frequent trading requires a significant time commitment to research, analyze, and execute trades. If you have limited time, a buy-and-hold approach may be more practical.
The optimal frequency for buying shares depends on your individual circumstances and investment goals. While the buy-and-hold approach offers a long-term, low-risk strategy for wealth accumulation, frequent trading may be appropriate for investors with a high-risk tolerance and deep market knowledge. By carefully considering the factors outlined in this guide, you can determine the investment frequency that aligns with your personal preferences and maximizes your chances of success in the stock market.
Remember, there is no one-size-fits-all approach to investing. The best strategy for you will depend on your individual circumstances, risk tolerance, and investment goals. Take your time, research your options, and consult with a financial advisor if necessary before making any investment decisions.
Time in the market is better than timing the market
Inexperienced investors frequently focus too much on timing the market. They frequently experience pressure to hold off until the ideal time to buy—when a company’s shares are trading for the lowest possible price.
It’s a perfectly normal tendency; nobody enjoys feeling as though they overpaid for something. However, in practice, even the most skilled fund managers are unable to consistently time the market!
In contrast, a DCA strategy eliminates all uncertainty when it comes to market timing. Rather, it implies that the most effective and reliable method of producing steady, long-term returns is to invest over time in the market.
Using this investment strategy, investors divide their desired total investment amount into smaller portions. They then invest these smaller amounts on a regular basis, averaging out their purchase price over time, as opposed to investing their entire amount at once.
This investing strategy doesn’t require a deep understanding of the market, making it especially simple for novice investors to set up. It’s not necessary to stay up to date on every piece of financial news; you can just set it and forget and watch your investment’s value increase over time.
Actually, the most important component of a DCA strategy is time. DCA can be a potent source of wealth if you have the discipline to stick with it over the long term, even though it might not guarantee you short-term profits.
Don’t pay excessive brokerage fees
Brokerage fees are the primary area of concern when putting a DCA strategy into practice. These are the usual fees that a broker will impose on you in order to process a transaction. The fee amount can differ significantly amongst brokers and may rise in tandem with the amount invested.
For example, Commsec charges a $29. Standard online trades through its platform incur a 95 brokerage fee, which rises to 0. 31% for individual trades totalling $10,000 or more. As you can expect, these costs can mount up quickly and begin to reduce your overall returns if you’re paying nearly $30 each time you invest. This is especially true if you are consistently making a large number of small investments.
For the next six months, let’s say you wanted to invest $500 each month. Each time you invest, you pay $29. 95 in brokerage fees. The table below illustrates how these costs alone total $179. 70% over the course of six months (20%) E2%80%94%, or nearly 6% of the total amount invested This basically means that your portfolio must increase by at least 6 in order for it to turn a profit again. 37% (from $2,820. 30 back up to $3,000).
| Time | $ Paid | $ Brokerage Fee | $ Amount invested | % Fee |
|
Month 1 |
$500 |
$29.95 |
$470.05 |
5.99% |
|
Month 2 |
$500 |
$29.95 |
$470.05 |
5.99% |
|
Month 3 |
$500 |
$29.95 |
$470.05 |
5.99% |
|
Month 4 |
$500 |
$29.95 |
$470.05 |
5.99% |
|
Month 5 |
$500 |
$29.95 |
$470.05 |
5.99% |
|
Month 6 |
$500 |
$29.95 |
$470.05 |
5.99% |
| Total | $3,000 | %179.70 | $2,820.30 | 5.99% |
These days, one can choose from a wide variety of online brokers, some of which have considerably lower brokerage fees. But the general idea remains the same: always be mindful of the fees you are paying, and consider this when determining how much and how often you would like to invest.
Consider this. The amount of fees we would pay would significantly change if we invested the same total as in our previous example, but instead of investing $500 monthly, we invested $1,000 every two months.
| Time | $ Paid | $ Brokerage fee | $ Amount invested | % Fee |
|
Month 2 |
$1,000 |
$29.95 |
$970.05 |
2.995% |
|
Month 4 |
$1,000 |
$29.95 |
$970.05 |
2.995% |
|
Month 6 |
$1,000 |
$29.95 |
$970.05 |
2.995% |
| Total | $3,000 | $89.85 | $2,910.15 | 2.995% |
Although we have invested a total of $3,000 in the above table, the amount of fees we have paid has decreased by half to $89 95. Likewise, the portion of fees that consume our entire investment has dropped to 2 995%, and our portfolio only needs to increase by 3. 09% in order to break even.
We have lowered the amount of money we have paid in fees and the impact they have had on our entire portfolio by altering the frequency of our investments. We have made fewer transactions overall, but we have still invested the same total amount of money.
It’s critical to keep these factors in mind when choosing your investment strategy. A successful, long-term investment strategy begins with finding the ideal balance between your investment frequency, investment amount, and fees paid. This can be challenging if you are also attempting to diversify your holdings.
Exchange-traded funds (ETFs) offer instant diversification in a single transaction, so if you want to follow a DCA strategy but are having trouble making regular investments while also diversifying, you might want to think about whether some ETFs would be a better option for your portfolio than investing in individual companies.
How often should you invest?
FAQ
How often should I buy and sell stocks?
Is it better to invest monthly or weekly?
How much should you invest in shares per month?
How many shares should I buy on average?
How many shares should I buy?
There are a few factors to consider when deciding how many shares of a particular stock to buy. In addition to your available capital, you should consider diversification and purchasing fractional shares of stock. With that in mind, here’s a quick guide that can help you determine the ideal number of shares to buy. Image source: The Motley Fool.
When should you buy more shares?
The second reason to buy more shares is when they present a rebalancing opportunity. “If the stocks in your portfolio have drawn down a great deal, like the majority of the major indexes,” Kampitsis says this is a perfect time to buy more as part of your rebalancing strategy.
When is the best time to buy stocks?
For investors, finding a stock to buy can be a fun and rewarding activity. It can also be quite lucrative—provided you end up buying a stock that increases in price. But, what is the best time to buy stocks? For day traders, the biggest market moves happen in the first hour of each trading day.
What if I don’t have enough time to buy stocks?
If you don’t have the time or money to buy dozens of individual stocks, look into low-cost index funds — which invest in hundreds of individual stocks for you. How many shares of each stock should you buy? That depends on the dollar amount you want to invest.