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I am planning to invest a little portion of my salary say 1000£ monthly on US & UK stocks and planning to hold on for long term. I am aware that investing in stocks might be risky compared to bonds and funds, and I am already investing some portion on bonds and funds. I have shortlisted some companies A, B, C, D & E of different sectors to hold on for long term investments of more than 10 years. Since I am considering to invest only via Stock ISA wrapper in UK, I will be purchasing the stocks via Stockbroker.

I would like to know the pros and cons of investing via each of the below scenarios:

  1. Invest all the allocated share's investment money of that particular month on any of the share which has hit its rock bottom on that particular month and buying the rest of the other companies in next month.

  2. Buy all the companies A,B,C,D,E I have shortlisted every month gradually. But some company like A might be worth 5$ where as E might be worth 500$ for your info.

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    You need to provide the transaction costs of buying each stock and how much you will be investing each month for the question to be answered. Will you literally only be buying 5 stocks? A portfolio of 5 stocks is not diversified and the market does not compensate you for bearing unsystematic risk (e.g. risk that can be reduced to zero with proper diversification).
    – Powers
    Commented Jun 18, 2015 at 14:27
  • I am planning to invest 1000£ every month and buying 5 stocks is an example. I am not looking at buying only 5 stocks
    – Ravi
    Commented Jun 18, 2015 at 14:35
  • What is the transaction fee for buying a stock? If it costs you 10£ per stock and you buy 10 stocks per month, then transaction fees are going to kill your performance.
    – Powers
    Commented Jun 18, 2015 at 14:38
  • yes the transaction fee will be approx 10£ per trade.
    – Ravi
    Commented Jun 18, 2015 at 14:39
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    Option 1 is a good plan if you can accurately predict when a stock has hit rock bottom. Halifax Sharebuilder lets you have a £2 dealing fee for buying one stock per month which is pretty cheap.
    – davidjwest
    Commented Sep 11, 2015 at 14:07

4 Answers 4

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You will invest 1000£ each month and the transaction fee is 10£ per trade, so buying a bunch of stocks each month would not be wise. If you buy 5 stocks, then transaction costs will eat up 5% of your investment. So if you insist on taking this approach, you should probably only buy one or two stocks a month.

It sounds like you're interested in active investing & would like a diversified portfolio, so maybe the best approach for you is Core & Satellite Portfolio Management. Start by creating a well diversified portfolio "core" with index funds. Once you have a solid core, make some active investment decisions with the "satellite" portion of the portfolio. You can dollar cost average into the core and make active bets when the opportunity arises, so you're not killed by transaction fees.

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To optimize your return on investment, you need to buy low and sell high. If you knew that one stock had hit rock bottom, and the others had not, buying the low stock would be the best.

However, unless you can predict the future, you don't know if any individual stock has hit the bottom, or if it will continue to drop.

If you decide to spend the same amount of money each month on stock purchases, then when the price is low, you will automatically buy more shares, and when the price is high, you will buy fewer shares. This strategy is sometimes called dollar cost averaging. It eliminates the need to predict the future to optimize your buying.

All that having been said, I agree with @Powers that at the investment amount that you are talking about and the per transaction fee you listed, a monthly investment in several stocks will cause you to lose quite a bit to transaction fees. It sounds like you need a different strategy.

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Powers makes a good point: trading costs may eat up a significant portion of your ROI. A fee as little as 2% can consume more than 50% of your long-term ROI! A rule of thumb is keep your fees to less than 1%.

One way to do that is to buy stock in companies that have a DRIP with a Share Purchase Plan (SPP). Often the SPP allows investors to purchase shares for low fees or free. Once you have the ability to purchase shares for (virtually) free, you can use InvestMete. Roughly, you send more money to the companies whose share prices are near their 52-week low, and less money to those who are near their 52-week high.

Getting back to your original question...

  1. Buy one thing that's the cheapest each month.
    Pros: Buying low.
    Cons: Buying only one thing that month.
    Using InvestMete with SPPs avoids buying only one thing a month.
  2. Buy a little of several companies each month.
    Pros: Diversity Cons: Buying high, excessive fees.
    InvestMete causes you to tend to buy low, and SPPs help you avoid fees.
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It would seem that you are in a position where you are able to save money and you hope to have your money work for you. From your statement above, it is implied that you are a professional with a steady income not related to the finance field. With that said, it is better to diversify your portfolio and have your money work for you through passive investments rather than an active one, where you actively search for companies that are below market price. That research takes time and much more experience in order to properly execute.

Now, if your overall goal is to trade actively, then maybe researching individual companies might be the best way to get your feet wet. But, if your goal is to create a diversified portfolio and make your money work for you, then passive is the way to go.

Two passive financial Vehicles: Mutual funds and ETFs. Depending on what you are hoping to accomplish in the future, an ETF or a mutual fund will likely suite your situation. I would encourage you to do your due diligence and find out the weakness and strength of each. From there you are able to make an informed decision.

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