Ask Colin

With capital of $50k, you would have an initial position of only $1k building to $3k. Is this worthwhile with $20 brokerage each way?

There are always problems when you have small investing or trading capital. I regard $50k as a minimum. However, it must be recognised that with small capital like this it is more difficult to make great returns because of the impact of brokerage and slippage.

My objective is to exceed the long term return from buy and hold, which is about 12% in Australia. With $50K as you describe, you are going to concede 2% to get in ($20 on each lot of $1K) and at least 0.7% on the way out ($20 on $3k, assuming you exit in one trade - which is reasonable in that you would only exit in multiple lots if you were taking profits and therefore the percentage will be lower, depending on the size of the profit). This means that you are going to be looking at 2.7% or so less return from the same investment than someone with large capital.

What can you do about this? One obvious move is to enter in one trade. That way your brokerage is only 0.7% on the way in and the same on the way out on a break-even investment (less on a profitable investment and more on a losing one). So now you have reduced about 2.7% brokerage to about 1.4%. The trade-off is that your risk is greater. The bigger your initial position, before the trend is confirmed, the bigger the risk, because more investments will fail in what look to be early stages of a trend. Also, if they do fail, you will have three times the loss compared to a smaller initial position. If your stop was, say, 10% from your purchase price, it may not make a lot of sense to save on the brokerage.

You could mitigate this to some extent by waiting until a trend has been clearly confirmed before buying. This may give up some profit opportunity, but lower the risk. As before, it is always a trade-off or risk and cost.

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