Another frequently asked question that we often get from readers and even students is:
"How Much Should I Invest Into 1 Stock?"
In this #AskDrWealth episode, we are going to identify:
- what's the minimum amount you should invest,
- what's the maximum amount you should invest into 1 stock, and
- how this should fit into your entire portfolio
What is Your True Cost of Investing?
Let's start with the minimum amount.
Since 2015, the minimum lot size on SGX has been modified from 1,000 to 100. This means you can buy 100 shares of any stock you desire.
For example, if you want to buy 100 shares of Golden Agri (GSX:E5H) at $0.355, you'll only need to invest $355!
To invest in stocks, you'll need to go through a brokerage. This means that there are commission fees involved.
Hence, the minimum commission is actually an important factor to determine the minimum amount you should invest.
The minimum commission simply pertains to the minimum fee that will be applied for each transaction. In Singapore, the minimum commission can go as low as $10.
So, let's say you invest $100 in 1 stock and it costs you $10. This means that your cost is as high as 10% of your invested amount:
This is quite ridiculous because in order for you to make back this 10% from the stock market, it's going to take a while.
You could invest for more than a year and still barely break even.
So it doesn't make sense if the cost of investment too high (in terms of % to your investment capital).
It will eat into your returns.
So, how much should you invest?
What is the Minimum Amount I Should Invest In A Stock?
If you take the $10 cost and divide it by the minimum commission of 1%. This gives you a figure of $1,000.
This means that if you want to keep your cost within 1% of your investment capital, you should invest a minimum of $1,000 (assuming your cost is $10).
If you have a different minimum commission, this is the formula again:
In my opinion, this should be the way most people should think when setting their minimum investment capital.
Aim to keep your cost below 1%.
And of course, if you can go lower than 1% or as low as possible, then that'll be the best.
Let's say 0.28% or even 0.2%. That'll reduce your investing cost significantly, and you'll be able to make back your returns a lot faster.
What is the Maximum Amount I Should Invest In A Stock?
Now that we've covered the minimum, let's flip the situation and look at the upper ceiling. How high should you go per stock?
Some of you probably have a lot more capital to invest.
You'll probably be wondering: "how much money should I put into 1 stock, without taking too much risk in the process?"
To answer that, we have to understand risk management, aka what is the degree of reasonable diversification?
What is the number of stocks you should have in your portfolio?
Research has found that a portfolio should have between 12 to 18 stocks to have reasonable diversification. Which means you reduce risk to a reasonable level.
Let's demonstrate this by comparing between investing in only 1 stock vs investing in 15 stocks.
If you only invest everything into just 1 single stock, it would be a very dangerous position. Nobody wants and nobody does that.
So what happens when you invest your capital equally into 15 stocks? That would work out to just under 7% of your capital in 1 stock.
This is definitely a lot more comfortable for most investors.
In a nutshell, if you invest 100% with a concentrated portfolio of a few stocks, investing might be too stressful since there's too much risk taken per stock.
You will want to find the balance between having sufficient potential gain when your stock picks are right, and a manageable potential loss when your stock picks are wrong.
Those are basically it.
Going back to the question how much should you invest in a stock, the answer lies in two things:
- The minimum investment amount should be based on your minimum commission, you should aim to keep your cost at 1% or lower.
- The maximum amount, on the other hand, should be about 7% of your investment capital in one stock. Or lower, depending on your personal comfort level.
With all of these, I hope you gained new insights on how to manage your investments.
See you next time on the next #AskDrWealth episode!
Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.