Top-Up Minimum Levels

[Raptor]

Unfortunately iWeb stopped the cheap dealing days.

But they only charge £5 per trade in any case! So always 'cheap'.

Point taken, but I remember the £2.50 days......

Raptor

[Rhomboid1]

I feel 1500 quid is about the lowest amount it makes sense to trade, without a cheap dealing day.

Surely that depends on the level of the miss pricing you believe you're buying into? I like to be fully invested and as a result trade very frequently but this year I've concentrated on tailoring my buy size to the NMS of the target if I get a small dividend of a few hundred I'll top up one of my micro cap holdings, a few thousand and it'll be a more substantial company. It works for me

[Gengulphus]

Hi Gengulphus,

There's an approximate formula I worked out and described many years ago by minimising the sum of the trading costs incurred per year and the expected lost returns per year:

I'm probably missing something, but isn't this overly complicated?

I don't really regard a formula involving a couple of multiplications, a division and a square root as "complicated". But yes, I could have given some simpler rules of thumb - fortunately, others have filled in for me!

Rules of thumb are however developed to deal with common situations in some particular area and don't necessarily work well for uncommon situations or other areas. For instance, when following a baking recipe whose temperatures are given in Fahrenheit, there is a useful rule of thumb to halve them to get the temperature in Centigrade: it's not perfectly accurate, but it's good enough in the baking temperature range, and it's easily remembered. Don't use it for room temperatures, though!

The main value of the formula is as a sanity check on the rules of thumb in uncommon cases. For instance, someone has a HYP in a SIPP that they've grown to £10k, when their other financial circumstances change for the worse and they're forced not to make any further contributions to the SIPP for a number of years - just to grow it under its own steam by dividend reinvestment. Assuming they're getting a 5% yield (so £500 dividends per year) and their broker commission is £12, they're going to need 2.4 years to build up the £1,200 cash needed to satisfy a "broker commission no more than 1% of the trade value" rule of thumb. But that sort of gap between purchases is well outside the area that the rule of thumb will have been developed for, and use of the formula with C=12, I=500 and R estimated at 5 as before gives a purchase amount of SquareRoot(200*12*500/5) = SquareRoot(240000) = 489.89... So actually, making a £500 purchase once per year is indicated as near-ideal and waiting for a £1,200 purchase to be possible well considerably poorer: the purchase commission of £12 is 2.4% of the purchase price, but the reduction in expected lost returns more than pays for that.

The net result is that I don't use the formula all that often, but do when I want to double-check a plan, especially if the plan is breaking into new territory.

Gengulphus

[Julian]

When I was building I really didn't give much thought to brokers' fees, at least as far as worrying about whether to buy £1,000 of something or wait until I got to £2,000 or £2,500. The reason that I didn't bother was because, in the context of my general expenditure and the fact that I was buying HYP investments that, barring disasters or unforeseen circumstances I expected to hold for decades (and mostly have), the savings from buying on a deal day or building a £2,000 holding with a single £2,000 buy vs two separate £1,000 buys seemed totally trivial.

Using the £1K/£2K example, if buys were at full broker fees of say £12 a trade, splitting my purchase into two £1,000 purchases presumably separated by a few months as funds accumulate, cost me an extra £12. If I want to assuage my guilt at being so profligate I could maybe drink 3 fewer pints of beer in pubs over those couple of months (yes, I live in London hence the beer prices).

Yes, technically I was inefficient in optimising my dealing costs but the upside is that it allowed me to decide my purchases based on exactly what I wanted to buy or top up at the time, sometimes splitting cash between two purchases if I had two good candidates and wanted to accelerate my HYP diversification, and not worrying too much about the fact that I doubled the broker fees incurred. I preferred to set aside concerns about squeezing out every last pound of dealing costs in favour of focussing more on buying exactly what I wanted to buy at any given point in time.

- Julian

[idpickering]

Any rules of thumb that more experienced HYPers go by?

I invest on a monthly basis via my ISA held with Halifax Bank. This is to make use of their cheap £2 commission, plus stamp, per trade. That works for me, but if I were to have to, or decide to, make a trade outside that time, I'd have to pay the highr commission rate. In that circumstance I'd try to keep my costs below 1% for that purchase.

Regards,

Ian.

[kempiejon]

Like Ian and others I use Halifax cheap dealing amalgamated purchases. I also have AJBell ISA they only do one day per month cheaply and it doesn't cover all stocks so I pay full price for some of my purchases and under such circumstance £1200 is my minimum.
When very early on building my HYP I set £300 with the Halifax and iii then £1.50 commissions. I was able to achieve pretty good diversification with only a few thousand invested, I felt this outweighed the goal to minimise % of costs to purchase.

[monabri]

Here's one we discussed earlier regarding topping up costs!

I assumed a net interest of 5% per annum and that all purchases pay stamp at 0.5%. Then we have a range of dealing charges ranging from £3 to £15 per transaction. The values in columns 2 to 4 are the net amounts after 1 year, after dealing and tax charges.



[For dealing costs in between these amounts, please interpolate.]

I pose the question, is it worth waiting for a "special dealing day" with the Halifax to save a few quid when the sums involved are probably going to be more influenced by sp movement - especially for a trade value of say £1500 to £2000?

[tjh290633]

I pose the question, is it worth waiting for a "special dealing day" with the Halifax to save a few quid when the sums involved are probably going to be more influenced by sp movement - especially for a trade value of say £1500 to £2000?

If you are in the early days of building a portfolio and want to reinvest dividends, when you are only adding new capital once a year into an ISA, then it is worth using the special day offers. Once you have achieved critical mass, then if you can trade at or above the £1500 level, I don't see that the date matters when you are reinvesting dividends.

If you are adding new capital monthly, then using the special days makes more sense, if you are not putting the full whack in each month. Many will not be in a position to invest £1666 per month.

TJH

[kempiejon]

I have before mentioned that when I started out in direct share ownership those cheap dealing days helped me down the road to diversity much faster with my few hundreds to invest monthly rather than saving and waiting to invest in just a couple of shares a year.
These days I tend to buy my ISA annually at the beginning of the year - but I still set to buy on cheap days and I have dividends to mop up every few months.

It is true that the price changes can easily wipe out any saving on fees but doesn't that cut both ways and as I'm not looking at those daily variations in price to bag the best profits then why not pay £2 instead of £12 to buy your picks, Halifax give me 3, 4 or even 5 days each month to fulfil an order and rarely is that going to throw the price off much, and I can even suspend my picks the evening before the deal is due to action.

[pendas]

There is a third way of trading shares with the Halifax.

Every month or so they have a 2 hour window between 12:15 and 14:15 where shares can be bought or sold at £3.95 per trade.

I tend to use the £2 collective deal for top ups of values from £500 upward. At £5k and above I like to know the price I'm dealing at.

[kempiejon]

Every month or so they have a 2 hour window between 12:15 and 14:15 where shares can be bought or sold at £3.95 per trade...

Good reminder, I have used these monthly special cheap days for buys and sells, there was a time when I used them for international dealing too in my non HYPing. As you say you do get see the actual price you trade at, which might give more peace of mind when slinging about a few grand.