IFB19: Portfolio Management as it Relates to Dollar Cost Averaging

 

Welcome to session 19 of the Investing for Beginners podcast. In today’s session, we are going to have a little different format than we have been doing. We are going to answer some of our reader’s questions on air. Andrew and I are going to take turns answering these questions, and this should be a lot of fun.

* What kind of diversification do you use for your eLetter portfolio?
* The importance of dollar-cost averaging
* Can you find the intrinsic value of an ETF?
* The importance of portfolio management
* Learning is a constant, ongoing situation

The first question is from Jamison: I have just begun receiving your newsletter, so I have the May 31st and June 1st editions are the first that I have read and would like to follow along with your portfolio. That being said I am starting with $4,000 in my account, a traditional IRA. I would like to buy the latest dividend fortress that you recommended. How much or what percentage do your normally buy? Any insight would be much appreciated.
Andrew: Obviously, I can’t give any personalized advice, legally. Let’s just say if I was to put myself in Jamison’s shoes and what I would do with a kind of larger sum. The portfolio obviously follows a $150 a month, and that’s every single month, which is a dollar-cost averaging. What that means when buying a recommended stock from the eLetter is that you’re going to buy up to $150 worth of whatever stock that is. Sometimes a stock will trade at around $20, be able to pick-up six or seven shares. Sometimes the stock trades at $110 and is only able to pick-up one share. With that extra money, if I’m picking up one share of $100, then I have $50 to $45 after transaction fee, I just roll that over to the next month, so the next month I will have $200, and I can buy however the maximum amount shares I can and just keep going in that way. Obviously, you don’t get this sort of perfect position size where every position a perfect 5% or 7%, or 3% of the portfolio. That’s just the nature of the beast, and this is something that happens when you are running a real portfolio with lower amounts. In contrast to a fund manager who is managing millions or billions of dollars and then we have the average person who maybe listens to this podcast. They have different things that they need to worry about, and that is one of the ways the eLetter is structured the way it is because it helps put yourself into the shoes of actual people who are average with average incomes and putting their hard-earned money into the market.
I guess the second part of that question is when you start with a larger sum, say $4000 and do you put that all in at once, with the one recommendation or do you split it up. It is all a personal decision, the way I want to look at it and it’s again going to be different for everybody. The dollar amount doesn’t matter so much, what matters is how much are you going to be dollar-cost averaging in the future? If you are starting with $4000 and you are going to be putting $4000 a month every single month. It doesn’t make any sense to split that $4000 up because it represents one position size.
Then again if you are only doing a $150 a month as a dollar-cost averaging and you have $4000, well then you don’t want to put that all in the last recommendation because now your portfolio is going to be 95% the June recommendation. The next month your are going to have this tiny amount for the next recommendation. You want to find a nice balance, the thing I responded to Jamison as he was an eLetter subscriber. But I thought this would be a great opportunity because other people might have this kind of question and it’s a good thing to try to understand really.