Motley Fool analyst Ron Gross joins us to answer your questions about sky high market valuations, IPO warning signs, starting an investment club and more.
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This video was recorded on Feb. 25, 2020.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Umberto Brokamp, personal finance expert here at The Motley Fool.
Robert Brokamp: Whoa!
Ron Gross: Umberto? Wow.
Brokamp: Hello.
Southwick: It's the Mailbag episode for February and we're joined, this month, by Ron Gross. Hey Ron!
Gross: Hey, hey. How are you? Great to be here.
Southwick: It's so good to have you. In this week's episode we're going to answer your questions about IPO warning signs, about the stock being too damn high, and how to start an investment club. All that and more on this week's episode of Motley Fool Answers.
Ron, thank you for joining us. Anything new in your world?
Gross: Lots of things going on always. Always lots of fun over on the investing team -- finding good companies for our members and our listening audience.
Southwick: Well, we're not going to talk to you about any of those companies today because, instead, we're going to answer your questions. Should we just get into it?
Brokamp: Let's do it!
Southwick: All right. The first question comes from Peter. "Hi, Alison. Love the show. Both Motley Fool Answers and the Museum of Fine Art are both abbreviated MFA. Coincidence?" I mean, this is a classy show.
Brokamp: Probably not. Probably not.
Southwick: Ron Gross, wouldn't you agree this is a classy show?
Gross: Oh, as classy as it gets.
Southwick: "I've heard someone on the show -- call him Brobert -- say that money should be invested in stocks only if it won't be needed for at least five years. How does this work? What if I don't need my money for six years? Should I invest it in stocks, but after one year goes by, that means I'll need the money in five years, so by Brobert's rule it shouldn't be invested in stocks anymore? Investing for one year, only, seems really risky."
Brokamp: Well, I'll speak for Brobert, here...
Gross: That is you.
Brokamp: ...and point out that I'm actually pretty squishy on this. Sometimes I say five years. Sometimes I say three to five years. This is partially because I think it does depend on the situation and the individual and it also partially depends on history, so let's look at some historical numbers, shall we?
Gross: Oh, please. I was hoping we would.
Brokamp: Please! So using data from the website of NYU finance professor Aswath Damodoran...
Gross: Whom I had as an equity professor when I was at NYU.
Southwick: No way!
Brokamp: Did you really?
Gross: Yes, he was my equity valuation professor.
Southwick: What was that like?
Gross: It was difficult.
Southwick: Yeah?
Gross: It was a lot of math. And back then we didn't really have a lot of [things] like calculators and stuff.
Southwick: Just a slide rule and your abacus.
Gross: Yes, my abacus. It was tough.
Southwick: On fire.
Brokamp: Anyways, so I pulled out my abacus and I calculated the percentage of instances over different holding periods where the stock market made money -- the stock market meaning U.S. large-cap stocks from 1928 to 2019. For a one-year holding period, the market makes money 73% of the time, so three out of four years. That's pretty good.
For three years 83% of the time and for five years 88% of the time, so not a big difference between the three and five years. Go out to 10 years, it's 94% and 20 years 100%. The longer you hold on, you are more likely to make money, but even a 10-year holding period isn't a guarantee that you're going to make money.
If I were really looking at a hypothetical six-year holding period, my first question would be how much have I already saved and is it almost enough to cover the cost? If I've already saved most of what I need, I probably wouldn't take a whole lot of risk with it.
That said, if I needed a little extra growth and I had six years, it doesn't have to be an all-or-nothing decision. I would probably put most in stocks, but gradually reduce the stock exposure as I got closer to the point where when I was two or three years away, it probably would be mostly in bonds and CDs.
This is what I did with my kids' college savings once they got into high school. Even now that my son is in college, a little bit of it is in the stock market, but not all of it.
Gross: If you remember a couple of years ago, I asked you for advice about the college situation and what I decided to do was put two years' of college into cash and then after one year [passed], I put another year in cash. There was always two years of rolling cash available, because if the market crashed, paying for college could have been dicey.
It was very painful to take out two years of college, because I don't know if you've noticed, but college is expensive.
Brokamp: It's expensive.
Gross: To take that out of the market and just have it sit in some low interest-bearing account was not the most fun thing in the world, but you know what? It did reduce my stress a lot because I just didn't have to worry about it.
Brokamp: Ron, what's your longest held position as an investor?
Gross: I've owned Disney stock for about 18 years.
Southwick: Oh wow! That's awesome.
Gross: It's been good to me, so far, speaking of the Eagles that I just saw over the weekend.
Southwick: So if you ever go to Disney World, you just walk around pointing at stuff, like, "I own that."
Gross: I bought that stock for my kids both around the time they were born. And my daughter's 22 now, so it's been a while.
Southwick: The next question comes from Bradley. "I've been fortunate enough to work my way into an executive position where I receive a yearly allocation of stock grants that are performance-based and vest over three years. Given this, I have amassed around $1.8 million of vested stock and will see $250,000 or more in stock vest each year for the foreseeable future."
Gross: Awesome.
Southwick: "This stock currently makes up about half of my net worth, which I need to fix, and I don't expect the stock to beat the market moving forward. What is a good rule of thumb as to how much stock I should own in one company? After I sell some of the stock, do I immediately buy a handful of stocks and index funds, or do I slowly reinvest the money?"
Gross: A good question. We were actually talking about this yesterday or the day before. I think it really depends on the individual risk tolerance. I think owning 10% of a stock at the time of purchase might be too much for most people -- owning 20 stocks at 5% or perhaps 30 stocks at 3% is probably better. You want to give your stocks room to run, so hopefully they're going to start appreciating in value and if you start at a very high percentage, it's going to grow to an even higher percentage. You definitely want to leave room for your favorite and best companies to run.
Eventually the position size, if you're lucky, will get to be too big a piece of your portfolio and then you can pare back. Absolutely nothing wrong with selling a portion of a stock to pare it back to a more reasonable level, lower the risk profile of your portfolio, and help your stress level -- help you sleep at night -- so you don't have too many eggs in that one basket.
Brokamp: And it's particularly important for Bradley because his job is also tied to this same thing, so he's mixing his investment capital and his human capital. The latter part of his question was if he were to sell should he invest that right into the stock market.
When you talk to financial advisors, when they bring over a new account and it was invested all in the stock market and it comes to them, they usually invest it immediately into the market to maintain the allocation. So as long as he's comfortable with investing in stocks, you generally move from stock to stock.
Gross: I think an index fund would be fine, too, if it was a stock index fund. But I think it's important to say don't panic. Don't freak out. It doesn't have to be the next day.
Southwick: Oh, I've got too much money. What do I do?
Gross: You can be methodical.
Southwick: It's a great problem to have.
Gross: Just make sure you like the stocks you're going to redeploy into the funds and then get it in there, but no need to panic.
Southwick: You're going to be just fine, Bradley. Just fine. The next question comes from Cameron. "Sometimes you talk about U.S. stock performance and international stock performance. How do you define international stock? Are emerging market stocks included? Is it weighted or is it just a measure of the performance of all world stocks minus U.S. stocks?"
Brokamp: Stocks are generally designated by wherever the headquarters are located and many folks think this doesn't really make much sense. We now live in a world with a global economy and many companies have revenues from all over the world. As of 2018, something like 43% of the revenue of the companies in the S&P 500 came from overseas and there are several companies that make most of their money from overseas, including Google, Caterpillar, and Exxon. Regardless, when we're talking international versus U.S. stocks, it basically comes down to wherever the headquarters address is located.
Usually when I talk about international stocks, I'm generally talking about the FTSE All World Ex U.S. index, because it includes everything. The most common international index is known as EAFE -- EAFE that stands for Europe, Australasia, and the Far East. Two of the biggest ETFs that track the EAFE are among the 10 biggest in the world, so a lot of people do invest internationally through the EAFE, but the EAFE doesn't include emerging markets and it doesn't include Canada.
I think it's a pretty narrow index, which is why I use this other one. I actually own a Vanguard ETF that tracks the FTSE All World Ex U.S. The ticker is -- VEU. It's market-cap weighted so the biggest companies have the biggest weighting. The top countries represented are Japan, the United Kingdom, Switzerland. So when I talk about international stocks, I'm generally talking about the whole world minus the U.S.
Gross: I would say if your intention is to increase your exposure to non-U.S. businesses, then the best way to do that is to see where a company does its businesses and not necessarily where it's domiciled; although, it's way easier to just think about where it's domiciled. In fact, in the Total Income Portfolio -- the Instant Income Portfolio in the service that we run -- we do it by where it's domiciled.
But actually, it's more important to see where a company is generating its revenue from, because even if it's domiciled in Europe but it does most of its business in the U.S., you're not doing what you intended to do, which is increase your international exposure. So looking through a bit, it's worth spending a couple of minutes to look through and see where those revenues are coming from.
Southwick: The next question comes from Nathan. "I am a 20-year-old nursing student and have been a big fan of the podcast for two years." Aw! Listening to us when you're 18 years old? What? "I started investing the day I turned 18 with a personal brokerage account and a Roth IRA and have since been able to share my passion by talking to my old high school graduating seniors on the impact of investing for the long term." Nathan, gold star.
"I love picking out individual companies and combing through quarterly earnings, however..." I'm just editorializing all over Nathan's letter.
Gross: Every sentence.
Southwick: "...however, it has been really tough to find companies that aren't crazily overpriced. I know timing the market is bad and I've been dollar-cost averaging into an index fund while I wait for a good buy, but my question is this. Is a 25% cash position in my portfolio -- in a CD, of course -- too conservative given my age? I'm pretty risk tolerant, generally, but I see the cash as a great opportunity down the line if and when I can find some better deals. Am I crazy?"
Gross: Nathan, you're not crazy, but let's lay it down here. The market is expensive and I think that's fair to say. The Warren Buffett indicator, which is total market cap of the stock market divided by the gross domestic product -- GDP -- is near an all-time high, which is a signal that stocks are expensive and it's Warren Buffett's preferred indicator of valuation.
If you want another metric, we can look at P/E ratios. P/E ratios are currently 24ish times trailing earnings. Historic levels are more around 18, so we're at 24 versus 18. Even if you want to give us a little bump because of a low interest rate environment, 24 is still a bit stretched. So the market is expensive.
But even with that knowledge, I think 25% in cash is a bit high. To have a quarter of your investable assets on the sidelines could potentially hurt your returns. For example, if you were 25% in cash in 2019, you would have missed out on a 30% increase in the market and that would have been somewhat painful.
Some investors prefer to be fully invested at all times, and then as long as their time horizon warrants it, you can just wait out the down cycles. I personally have usually between 5-10% of my portfolio in cash, just so I can be opportunistic. Buy new things. Buy on the dip. 25% is a bit high.
Southwick: The next question comes from [Allen]. "Like most 401(k)s, mine has a bond fund. There's also an option for a so-called income fund, which is made up of synthetic and traditional G-I-Cs..."
Brokamp: GICs. We'll talk about what those are.
Southwick: "...which I learned stands for guaranteed investment certificates. Since these are contracts between my 401(k) manager and insurance company, are they any more or less risky than a bond fund? What else should I know about them?" Yes, what else should I know about them? GICs?
Brokamp: First of all, there are actually two kinds of GICs. There's guaranteed investment contracts and guaranteed investment certificates. Allen mentioned certificates, but actually the certificates are issued by Canadian banks, sort of like our CDs, so I'm actually guessing that Allen, if he's a U.S. citizen in a 401(k), he actually has guaranteed investment contracts.
Like he said, they are offered by insurance companies and they're essentially a cash-like option. They yield a little bit more than a typical savings account. They're not FDIC insured, but because they are backed by insurance companies, insurance companies are pretty heavily regulated so they're pretty safe. In fact, there are very few examples that I could find with GICs losing any sort of money.
Allen asks if they are safer or riskier than a bond fund. I would say, first of all it depends on the bond fund, but GICs are designed to maintain a stable value -- something like a dollar per share. So they're sort of like cash.
So generally speaking I would say slightly safer than a bond fund. Probably over the long term, though, it will return a little bit less and honestly, if I had both GICs and a good bond fund in my 401(k), and I was looking for safe non-stock alternatives, I'd probably put a little money in both.
Southwick: The next question comes from John. "Is the current deluge of IPOs a warning similar to what occurred prior to the dot-com bust?"
Gross: In a market where valuations are stretched, which is where we are right now, investors look for new things to invest in and IPOs often fit that bill. I don't think we are actually at the level of the dot-com bubble. That was a pretty extreme time in history, but we have seen several IPOs -- Uber comes to mind -- that haven't gone well. Others like WeWork have been pulled.
I think we're now seeing an appetite for companies to come public that are actually profitable or have a path to profitability rather than a lot of these companies that went public in 2020 who had no profitability even in sight and the valuations were crazy -- a lot of these unicorn IPOs you hear that are valued over $1 billion before they come public.
So I think maybe for 2020 it's going to bode well for some IPOs because we're going to start to see companies that perhaps are either a little more mature or profitable. Have thought through their business models a little more. I think investment bankers are going to be a little more wary about just taking any old company public because there was a little bit of that frothiness that the question gets at.
But nowhere near the dot-com bubble in my opinion. I think it's actually good that we saw a little bit of shakeout because it will make things a little bit normal going forward.
Southwick: Are there any companies you're hoping are going to IPO that you're anticipating you would maybe be excited about?
Gross: The hot one for 2020, right now, is Airbnb, which does look like they're profitable, at least for 2017 and 2018. I think I saw numbers that indicated profitability. That's one that a lot of folks are anticipating.
Some of the food delivery businesses like Postmates and DoorDash potentially could come public, too. Those I'd be a little bit more wary about because I don't think they've figured out how to be profitable quite yet and there are perhaps too many of those delivery companies in the industry. Maybe it's a bit too fragmented and we need some consolidation. That could then lead to profitability. You might be a little bit wary of those.
Southwick: Our next question comes from Matt. "I recently changed jobs and did not roll over my previous retirement account from my former employer. Instead, I'm going to leave it dormant, by which I mean no money coming in or out until I retire in 25 to 30 years. I'm hoping it will grow in its sleep.
"But I'm worried. If my funds are poorly allocated now, they might stay like that forever. I'm not adding to it, so it's not like I'll be getting a good price when the market drops. All I can do is reallocation."
Brokamp: When it comes to deciding what to do with an old 401(k), you have two areas to investigate. First of all and probably the most important are the investment choices. Are they outstanding? Are they choices you couldn't get on your own? Are they particularly cheap? Sometimes when you have a really big 401(k) they can negotiate extremely low expense ratios on funds. That's good. Sometimes really good actively managed funds close to new investors, but if they're still in a 401(k), they remain open, so there might be something like that in your 401(k).
And the other area is overall cost. It costs money to run a 401(k). Some employers cover it all, sometimes they make the employees pay for it, or sometimes the employers cover it but then if you leave the company you have to pay for it and frankly, that's what we do, here, at The Motley Fool. If you leave and you stay in our 401(k), you have to pay an account fee.
Put those two together and for most people I would say it's better just to move the money to an IRA, possibly your new 401(k) if it is also outstanding. But if you move it to an IRA, you don't have to worry about account fees, these days there are no commissions, and you have a choice of literally thousands of investments -- mutual funds, ETFs, stocks, bonds, CDs, and pretty much whatever you want. That's generally the move to make.
By the way, you said if you leave the 401(k) there it will be dormant with no money coming in, but that's actually not true, because you own funds that are probably paying dividends of some kind. And what are you doing with those dividends? You're reinvesting them and buying more shares, which then pay more dividends, which buy more shares.
So to give you an illustration of how just leaving something alone -- even if you are not adding money to it but you're just buying more shares -- how many more shares you would accumulate -- I asked Vanguard. I asked them if they could give me an idea of how much an investment in the Vanguard 500 would grow over 20 years in terms of how many extra shares you would have and they very kindly obliged.
Southwick: That was nice.
Gross: Good folks over at Vanguard.
Brokamp: They are very good. Let's say it's December 31, 1999. You put $10,000 into the Vanguard 500. You would buy 74 shares. If over the next 20 years you reinvest all those dividends, by the end of 2019, you would have 106 shares. Your share count actually grew by [32] shares.
Most people do reinvest those, but you don't have to. You can let them accumulate in cash and then be more deliberate or intentional about where to invest that. I'm just bringing that up because I do think it's important that just about every investment -- especially if it's a 401(k) fund -- cash is coming in and you can make decisions about how to invest that.
Southwick: Our next question comes from Paul. "My friends and I started a small investment club in 2018. The seven of us each put in $50 per month and purchase a stock with it. The goal for us is to use the forum to stay in touch and discuss investing and business on a high level. We are complete novices, but we got lucky on a few stocks -- Arrowhead Pharma and Okta -- and our returns have been pretty good. An issue we suffer from is spreading our portfolio too wide and thus only capturing, at best, the market average. As the money has grown, it's gotten our wheels spinning on interesting ways to put our funds to work. We could put it in high-dividend securities and use the funds for a fancy dinner once per year. We could put it all in an S&P index fund. We could continue to seek out high growth opportunities or cash out completely so we all stay friends. I would love to hear your thoughts both on stock clubs in general and what you would recommend we do with this money."
Gross: That's awesome. I love the idea of investment clubs. I had an investment club when I was in my early 20s. I set it up as an actual partnership and it was a nightmare at tax time, but it was fun. In my case, we all pooled our money together and I managed it for everyone, so that was fun.
One fun way that I've seen investment clubs operate is that the participants take turns on a monthly basis pitching stocks and then everyone debates it and then votes. That's one good way to pick stocks. Another suggestion is for the whole team to identify an emerging trend, like 5G for example. Then everyone goes to work to try to find maybe one or two companies in that emerging trend. Then they discuss and then they vote. That's actually really fun because you're always on the cutting edge of what's going on in the stock market.
I will give a plug for Stock Advisor, our flagship service, here. It's great for investment clubs and I know some investment clubs that use it: debate our picks, pick and choose from Tom and David's favorite companies, and then make decisions based on that. I wouldn't worry about over-diversifying or getting too many stocks to beat the market. At some point that may be true -- upwards of maybe 30 companies or 50 companies -- and then you can maybe pare back and increase positions in your favorite companies if that happens.
I would say just keep it going. It's a lot of fun, it does build friendships, and it increases your knowledge of the markets and, as I said, those emerging trends. I think it's great.
Brokamp: Another resource is BetterInvesting.org, which is the website of an organization that used to be called the National Association of Investment Clubs. Then it became the National Association of Investors Corporation. Basically it's a resource for people who band together to invest. They have some suggestions for how to do it. They also recommend some software, like how to handle the accounting of the investments.
Gross: That would have been handy 30 years ago.
Brokamp: Yes. So just check it out -- BetterInvesting.org.
Southwick: The next question comes from Scott. "I am nearing retirement and have a defined benefit pension plan. I plan on taking a lump sum pension payment and rolling it into an IRA. I'll have a very large traditional IRA." A good problem to have. "If I need living expenses in retirement, what do you think of using the traditional IRA and delaying Social Security? This would lower my future RMDs. Can you also comment on the recommended withdrawal strategies on which account to pull from first, second, etc.? I have a Roth IRA, a traditional IRA, Roth 401(k), and conventional 401(k) and a taxable stock account."
Brokamp: So Scott, your Social Security benefit grows approximately 7-8% a year for each year you delay and that's guaranteed. There's virtually nowhere else you can get a guaranteed 7-8% these days. If you can earn more than that in your IRA from just a pure numbers perspective it makes sense to take Social Security now and to delay withdrawals from the IRA, but you're going to have to take some risks with that. You're not going to get that guaranteed 7-8% so you just have to decide whether it's worth taking that risk or not.
In terms of the order of tapping accounts, most studies indicate that it's better to drain the taxable brokerage account first, then the traditional accounts, and then leave the Roth for last unless there are certain years when you're going to be in a particularly high tax bracket or you indicate that you're going to be in a lower tax bracket in the future. Then it makes sense to tap the Roth sooner. Basically it's a decision you should make every year in retirement -- projecting your tax rate to the following year and deciding which account you should tap first.
Another thing to keep in mind is that there are no required minimum distributions from a Roth IRA, but there are from a Roth 401(k), so it's another reason to move the money from the Roth 401(k) to a Roth IRA.
One quirky exception why you might want to leave the money in a 401(k) is generally if you take money out of a retirement account before age 59 1/2 you owe a 10% penalty. There's one quirky rule that between the ages of 55 and 59 1/2, if you retire between those ages, the 401(k) that you most recently had you can take the money out and avoid that 10% penalty.
Gross: I didn't know that.
Brokamp: Yes, not an old 401(k), but just from the 401(k) you just left. That's another reason to leave some money in that one.
And then finally, thanks to the newly passed SECURE act, you won't have to take your required minimum distributions until age 72. For most people, the RMD at that age is about 3.9% of the account, so it's not really enormous and it's probably close to what you were going to take out anyhow.
Southwick: The next question comes from Jeff. "In a previous mailbag episode, Buck Hartzell pointed out that when you buy a stock it's essentially just a transaction between you and the person you're buying the stock from. Months ago, Morgan Housel was a guest and said one of his pet peeves is when someone uses the phrase 'more sellers than buyers,' since it's always a one-to-one ratio.
"My question is how is it possible that there are always the same number of buyers and sellers? What happens if more people want to sell shares of a stock than there are buyers for? I only have experience buying big, well-known companies -- Procter & Gamble, Coca-Cola, Johnson & Johnson -- and so on, but is it really possible you could try to sell or buy shares and there's no one there to buy or sell from?"
Gross: Yes!
Southwick: That's great. This is what Buck thinks. This is what Morgan thinks. Now we've got Ron.
Gross: No, they're right. It's just the actual words. There aren't the same number of buyers and sellers when you think of human beings, the buyers and sellers as human beings. But there is always the same [number] of shares that trade hands. The stock market is a true auction, but it just doesn't feel that way because computers handle everything.
So in a simplistic way, let's assume there's only two people and one wants to buy 100 shares of Microsoft and one wants to sell 100 shares of Microsoft. The factor that will adjust so that trade gets done is the price of Microsoft. It will fluctuate based on how badly each person wants to get their side of that trade done. If they can't agree on a price, the trade actually won't get done and the same [number] of shares will trade hands and that amount is zero. If they can come to an agreement, the same number of shares will trade hands, and that will be 100 shares.
Now if we get a little more complicated and we assume someone wants to sell 100 shares of Microsoft at the current price of around $183 a share and there's only one person willing to buy 50 of those shares. There's only one buyer that wants to take 50 of the shares off their hands. The seller will then have to adjust his price down until he finds someone who thinks the price is attractive enough to come in and buy the other 50 shares.
If that never happens, then the person will only be able to sell 50 shares out of the 100 or he can choose to sell none and hold his 100 shares. Either way, there's still the same exact amount on the buy side and the sell side with the price being the [what fluctuates] and goes up and down to get the deal done, just like if you were trying to sell something on eBay and someone wasn't willing to pay $50 for your old crockpot and said, "I'll do it for $40," and you either said yes or no and eventually one crockpot would change hands on the buy side and the sell side.
Southwick: Then if I'm thinking about my side of buying and selling stocks, it's crazy to think that at that exact second there is someone on the other end who does want my stock. Or does my broker decide, "Whatever. I'm going to buy your stock and then I'm going to sell it." Is it more complicated than that?
Gross: That can happen, too. They try to match trades up, but brokers can take stock into inventory on their own. Market makers are there to make the market liquid and fluent. But you can really see this in real time if you put in a limit order for a stock. So if I put in a limit order right now to sell Microsoft at $200 a share, it will not fill because the market is telling me Microsoft is only worth $183 and nobody will take my price. Then it will be up to me to decide whether I want to lower and come down to around where the market is in order to get that filled. I might not want to and, therefore, I would just hang onto my shares. But you can really see this whole thing illustrated when you use limit orders.
Southwick: This is a dumb question. So you see a stock certificate and they have a stock number on it. This is your official share. Even though it's all ones and zeroes, do the shares that I own still have specific share numbers? Can I see where my little piece of paper went? My virtual piece of paper? No, it turns out Bro owns my share.
Gross: Unless you request differently, the brokerages hold the shares in what's called street name and they hold onto their certificates in their own name. You can call your broker and say, "I want my actual certificates, please," and then they'll change the name on it to you and they'll mail them to you.
Southwick: I can still get paper certificates?
Gross: In my active hedge fund investing days, in order to engage in a proxy contest or any kind of a hostile takeover, you actually needed to have stock put in your own name. It couldn't be in a street name at your broker. I still have a five-share stock certificate of Syms Department Store sitting in a file cabinet somewhere back from those days.
Southwick: That's awesome. The next question comes from Taylor. Oh, it's our last question, too. "I would like to hear your opinion on having two Roth IRA accounts with different brokers. My Roth is with Fidelity but I've been thinking about opening a second Roth with Charles Schwab because I'd like to take advantage of the fractional shares. My thinking is that since I'm only investing $160 a paycheck -- 10% of my salary -- I could spread my money out more with fractional shares instead of having to wait several paychecks to buy complete shares."
Brokamp: Well, Taylor, I have good news for you. As of a few weeks ago, Fidelity now offers fractional shares.
They're now calling it dollar-based investing. As far as I can tell, you have to use the app, at least currently. I assume at some point they'll make it available on the website. Anyways, you can do it.
Schwab, on the other hand, announced last year that they're going to offer fractional shares but they still haven't implemented it yet. And there are a few other brokers that offer it -- Interactive Brokers, SoFi, Robinhood. But just so we all understand what fractional shares are, it's basically being able to invest any amount in a stock regardless of its share price. Consider that Amazon.com, as of this taping, is around $2,100. If Taylor wanted to buy one share of Amazon, he'd have to save up 13 paychecks worth of money.
But now that he can do fractional shares, he can invest that $160 and get a fraction; technically, 2/25 of a share...
Gross: Nice of you to do the math for everyone.
Brokamp: ...of Amazon.com which may sound small, but if Amazon's stock goes up like 10% over the next year, his $160 investment will also go up 10%.
Southwick: But you don't get to go walk around Amazon HQ and point at stuff and say, "I own that."
Brokamp: I own 2/25 of that.
Gross: What's really cool, now, is that with most brokerages doing away with commissions, you no longer have to worry about investing only $160 because that $5 commission, which used to be a pretty big chunk of $160 is no longer a concern. A great kind of thing that's happening for young investors or people with not a lot of money to invest at a single time. A really great innovation for consumers that the brokerages have put forth.
Brokamp: Yes. 2019 was the year of eliminating brokerage commissions and it would be great if 2020 is the year of more brokers offering fractional shares. I think it would be great for the individual investor.
Southwick: Well, that's it. That's all our questions for today.
Gross: So much fun.
Southwick: Ron, thank you so much for joining us.
Gross: Thank you for having me.
Southwick: Will you come back again?
Gross: I will. Thank you.
Southwick: I'll try to editorialize less. I'll work on my dulcet crystal tones. Does that make you feel a little bit better?
Gross: Is that a plug for Motley Fool Money?
Southwick: Yes, you guys can go listen to Motley Fool Money. That's OK. You can also answer our listener's survey if you don't mind. The link is in the episode notes. We'd really appreciate it if you can give us some feedback on how we're doing and what you want to hear about and all that good stuff.
Well, like I said, that's the show. It's edited fractionally by Rick Engdahl. Our email is [email protected]. For Bobbert Brokamp I'm Alison Southwick. Stay Foolish, everybody.
