How Much Does It Cost To Build An Individual Stock Portfolio?
One advantage to building your own individual stock portfolio is the cost can be much cheaper than a portfolio of mutual funds or ETFs.
Aside from the initial set-up period, and assuming you don’t trade very often, a portfolio of individual stocks can cost just a fraction of even the cheapest funds on the market.
I started building my dividend stock portfolio with TD Waterhouse in 2009. Since I had less than $50,000 in total assets, I had to pay $29 per trade. In hindsight I should have started with Questrade, the low cost online brokerage which charges less than $5 per trade.
Related: Questrade Tutorial – How To Use The Trading Platform
Still, my trading costs have been minimal over the last four years. I looked back at my trading activity to determine how much my DIY portfolio of individual stocks has cost me.
Cost of Individual Stock Portfolio:
| Year | Trades | Cost | Assets | MER |
| 2009 | 13 | $377 | $25,328 | 1.49% |
| 2010 | 18 | $522 | $31,067 | 1.68% |
| 2011 | 5 | $145 | $36,659 | 0.40% |
| 2012 | 3 | $30 | $46,275 | 0.06% |
| 2013 | 3 | $30 | $55,183 | 0.05% |
As you can see, it was pretty expensive to buy and sell stocks at $29 per trade. That’s why it makes sense to go with a low cost brokerage when you’re first starting out. Over time, it has become much cheaper to manage my investments.
I only have 16 individual stocks in my portfolio at the moment, but I’m still in the accumulation phase and I expect to add another 10 or 12 stocks over the next decade.
Related: How Much Of Your Income Should You Save?
Let’s assume that, instead of buying individual stocks, I purchased a popular dividend ETF – iShares’ CDZ. This ETF tracks the Canadian dividend aristocrats and is one that I use as a benchmark for my own portfolio.
I’ll keep the math really simple and say that I bought $25,000 worth of CDZ back in 2009 and then added new money twice per year.
Cost of Dividend ETF Portfolio:
| Year | Trades | MER | Assets | Cost |
| 2009 | 1 | 0.66% | $25,328 | $196.17 |
| 2010 | 2 | 0.66% | $31,067 | $263.04 |
| 2011 | 2 | 0.66% | $36,659 | $299.95 |
| 2012 | 2 | 0.66% | $46,275 | $325.41 |
| 2013 | 2 | 0.66% | $55,183 | $384.21 |
While the cost of an individual stock portfolio goes down over time, the opposite happens with the dividend ETF portfolio. That’s because the 0.66% MER takes a bigger bite from your investments as they grow in value.
I’ve saved $365 in fees by building my own portfolio of individual stocks instead of purchasing CDZ. That gap will continue to grow over the years as my investments grow and my trading costs go down.
Now, just for fun, let’s assume that I bought RBC’s Canadian dividend fund, the biggest dividend mutual fund on the market. I’ll use the same assumptions as before, but keep in mind there are no trading costs associated with buying mutual funds.
Related: Are Mutual Funds Really That Bad?
Cost of RBC Canadian Dividend Mutual Fund Portfolio:
| Year | MER | Assets | Cost |
| 2009 | 1.78% | $25,328 | $450.84 |
| 2010 | 1.78% | $31,067 | $553.00 |
| 2011 | 1.78% | $36,659 | $652.53 |
| 2012 | 1.78% | $46,275 | $823.69 |
| 2013 | 1.78% | $55,183 | $982.27 |
RBC’s dividend mutual fund would cost more than three times what my portfolio of individual stocks cost to set up – $2,360 more!
You can see how fees can be destructive to your investment returns over time. And that’s with a relatively small portfolio of $50,000. Imagine the impact 1.78% MER has on a $250,000 portfolio each year. That’s nearly $4,500 in fees each year!
Final thoughts
I recognize that a small portfolio of individual stocks comes with more risk and higher volatility than an ETF or mutual fund holding dozens or even hundreds of stocks.
But studies have shown that a diversified portfolio of 20 to 30 individual stocks isn’t significantly more volatile than a portfolio that holds 50 or even 100 stocks.
Related: The Beginners Guide On How NOT To Start Investing
I’ll continue to build up my portfolio of dividend stocks and be satisfied that I’m saving hundreds (if not thousands) per year on fees.
Hi,
I enjoyed this article, but I have a question. Have you found your dividend yield with CDZ has increased over time, the way most dividends from individual stocks do?
@John – I don’t own CDZ, just individual dividend stocks. The yield on CDZ changes from year to year as their holding change – because a stock needs to have raised its dividend for 5 straight years to be included, so the list is always revolving.
“But studies have shown that a diversified portfolio of 20 to 30 individual stocks isn’t significantly more volatile than a portfolio that holds 50 or even 100 stocks.” – Really? Interesting point.
i love this post. it sure opens your eyes to the cost of etf’s and mutual funds. i still have my cibc monthly income funds at 1.48% mer — and probably some hidden fees that i’ll never know about. i have been trying to unload them for 2 years but i’m still not even! now with bond yields increasing i’ll probably be waiting another 2 years.
@Gary – thanks! It’s easy to overlook the fees when your funds are performing well. Not so much when they’re treading water (or worse).
definitely you suppose to calculate trading expenses. When you go with big banks like RBC, CIBC, TD and etc you pay high commissions for a trade. It is definitely better to go with online brokers which are much cheaper, especially when you operate with less than $50K. It is simple math, but not a lot of retail investors like to calculate. Even MF are expensive and many of them are not profitable they will be around because most of the people either lazy or do not have time to calculate and analyze.
I’ve used Scottrade for years to build the individual stock investment portion of my portfolio. Their fees are around $7 per basic trade and I only trade several times a year. My expenses have been what yours were for 2012-13. However, you are right there is more risk, especially for the beginning investor who doesn’t understand how to pick quality stocks.
Nice post Robb. Seems we’re on the same wavelength. 🙂
I liked how you compared your costs vs. CDZ and the RBC Dividend Fund.
Mark
I’m all for individual stocks but equity mutual funds can give you diversification by default. Last week the U.S. stock market took a hit. My 2 mutual funds took a hit as well. But still the last 8 months, it has gone up from when I bought them. This week it’s picking up again.
As long you don’t panic and I am not the kind, you should do Okay.
You definitely made a good point. Even small expense ratios of funds can add up over the years.
At the same time, individual stock investing may not be appropriate for everybody – some lack the time/knowledge/desire to pick their own investments and would prefer the convenience of an index fund.
Commission-free ETFs make this a much harder argument to win though Rob. Even if it’s only commission-free buying, as long as you are a buy and hold investor, that’s almost the same thing.
I’m just hoping the CAD holds up for another few years so that I can continue to access the ultra-low MERs we see on broad index ETFs on the NYSE – and in the meantime that Canada’s offerings inch downward in order to compete!
I always read a lot of stuff by guys like Rempel and JT McGee (Money Mamba) as well as the usual books. Stocking picking intrigues me on a vain level (in many of the same ways playing poker and/or fantasy football does actually) so maybe one day I’ll use the “core and explore” and dedicate 10-15% of my portfolio to playing with mid-cap stocks or something like that just to get my Gordon Gekko fix.
@Kyle – Did you read the latest issue of MoneySense? Of course you did, your book was mentioned!
Anyway, I thought Dan’s article was pretty interesting in that he admits indexing got trounced by 13 different strategies for the period between 1968 and 2011.
Anyway, the point of this article is that, over time, your trading commissions have less of an impact on your total investing costs and your MER, even if it’s a cheap broad based ETF, will eventually drag on your returns and become more expensive than a portfolio of individual stocks.
I read alot of sites. I have to admit this was one of the best explanations ever. Congrats. I am 57 years old ( retired at 53) and some of my RRSP are in the dreaded seg funds with a Deferred sales charge and the rest in GIC’s. My wife is terrified in losing any money, but I can see how you can build a great retirement the way you are going along. I KNOW I have to slowly buy great companies to succeed. Thanks again and for explaining things in easy raeding and understanding.