Purpose/benefits of having a large investment portfolio?

Question

I wonder what the real hype is over having a big investment portfolio. I'm not talking about just simply a giant mix of assets, but a big 💰💰💰 portfolio -- purely the overall worth of it.

I have seen people who talk about how they've managed to create $5,000,000.00+ portfolios over 20 or so years of putting money in to the market -- and most of it consists of the riskier stuff (like stocks).

My basic wondering is, what's the value/benefit of having so much money in the market? Because....

1.High-volatile assets change in value a lot -- they grow and shrink -- every hour of every day. In such a case, that multi-million dollar portfolio or so can become 100K only. In short, the value changes, so you can only average or find the median of your assets. For example, if I buy one share of GOOGLE now for $830, I could have $860 within the end of tonight -- totally possible and maybe even likely.

2.Bigger total value invested doesn't equate to bigger nor faster returns. If I were to try trading in place of investing, I could turn a quick, $830 GOOGLE share and get 100% back and some profit, simply if I sell it and clear the smallest difference back from its market value the minute it goes up to, say, $850. In this case I've made bigger returns in shorter times, but my portfolio was super tiny in comparison.

3.If the money has low-returns, it's the exact same thing, almost, as just keeping the money. For example, if I were to invest $1,000.00 in gold to have $1,000.00 worth of gold, it's no different than keeping $1,000.00 in cash -- except for maybe the lack of potential growth and inflation losses. Then again, the value can go down, which means I could've had more money should I not invest at all.

Plenty of people pour everything they can into the market, including dividend re-investing and such. The goal is to create a bigger and bigger, mixed, and highly-valued set of an overall portfolio.

How is this a beneficial thing, for the reasons I gave above?

Answer 1

There are several problems with your reasoning:

if I buy one share of GOOGLE now for $830, I could have $860 within the end of tonight -- totally possible and maybe even likely.

You can do the same thing with 1,000,000 shares of google, and it's just as likely to go down as go up.

if I were to invest $1,000.00 in gold to have $1,000.00 worth of gold, it's no different than keeping $1,000.00 in cash

It's VERY different. Gold can be just as volatile as stocks, so it certainly is different as just keeping it in cash.

Benefits of a larger portfolio:

• More opportunities - there are many funds that have a very high initial investment requirement. You can also invest in other opportunities like commercial real estate, direct investments, etc.
• Diversification - you can invest on multiple assets, thus reducing your overall risk (if done correctly). Not just different stocks, either. You can invest in real estate, bonds, commodities, etc.
• Reduce costs - transaction costs are smaller (relatively) when you trade larger volumes, but the savings diminish quickly as transaction size increases (the savings from trading 200 vs 100 shares is much greater than trading 2,000 vs 1,000 shares).

Answer 2

The biggest benefit to having a larger portfolio is relatively reduced transaction costs.

If you buy a $830 share of Google at a broker with a $10 commission, the commission is 1.2% of your buy price. If you then sell it for $860, that's another 1.1% gone to commission. Another way to look at it is, of your $30 ($860 - $830) gain you've given up $20 to transaction costs, or 66.67% of the proceeds of your trade went to transaction costs.

Now assume you traded 10 shares of Google. Your buy was $8,300 and you sold for $8,600. Your gain is $300 and you spent the same $20 to transact the buy and sell. Now you've only given up 6% of your proceeds ($20 divided by your $300 gain).

You could also scale this up to 100 shares or even 1,000 shares.

Generally, dividend reinvestment are done with no transaction cost. So you periodically get to bolster your position without losing more to transaction costs. For retail investors transaction costs can be meaningful. When you're wielding a $5,000,000 pot of money you can make your trades on a larger scale giving up relatively less to transaction costs.

Answer 3

The compound annual growth rate of the S&P 500 over the last 20 years is in excess of 7% annually. http://www.moneychimp.com/features/market_cagr.htm Several index funds mirror the S&P 500 such as, but not limited to SPDR S&P 500 ETF Trust.

An annual growth rate of 7% on a $5,000,000 portfolio implies gains of $350,000 per year, every year investing passively. Most of us can live reasonably well on $350,000 per year!

I will argue that the chances of all 500 companies in the S&P 500 going bankrupt or nearly so at once is slight and less likely than the same for Google.