One Dollar at a Time: The Potential of Fractional Shares May 20, 2024

One Dollar at a Time: The Potential of Fractional Shares

Table of contents
1. Introduction
2. Dollar-Cost Averaging
3. Popularity of Dollar-Cost Averaging
4. Small Change Big Impact


Introduction

In today’s fast-paced world, young investors are presented with an array of opportunities to secure their financial future. However, the thought of investing can often seem daunting, particularly to those who may believe the myth that a large capital is required to start investing. Yet, it is precisely these young individuals who stand to gain the most by adopting the dollar-cost averaging investment strategy over longer time horizons. By lowering the barriers to entry and emphasising the importance of consistency, and incremental investments, this approach empowers individuals to embark on their wealth-building journey a dollar at a time.


Dollar-Cost Averaging (DCA)

Fractional shares have revolutionised the concept of dollar-based investing by enabling investors to own portions of big-name stocks. This development allows individuals to invest a set amount—such as S$100—into a single share or across multiple shares, making it feasible for young investors to stake in their favourite brands like Spotify (SPOT), Google (GOOGL), Nike (NKE), Apple (AAPL), Netflix (NFLX), Puma (PUMA), and McDonald’s (MCD).

One Dollar at a Time: The Potential of Fractional Shares


Based on the example above, young investors can consistently invest a fixed amount into the “Magnificent Seven” shares for long-term wealth accumulation. Dollar-cost averaging, facilitated by dollar-based investing simplifies the process of sustained long-term investment. By cultivating the habit of making regular investment from an early age, individuals can forge an accessible path to building substantial wealth over time.


Popularity of Dollar-Cost Averaging

Beyond the straightforward approach of dollar-cost averaging, investors have the flexibility to invest any amount, starting from as little as US$1. This method allows investors to decide when to invest and where to allocate their funds with, freedom to tailor their investment strategies according to their personal preferences and financial objectives.

One Dollar at a Time: The Potential of Fractional Shares


The upcoming feature in POEMS for fractional share, known as Bundle Investing will enable clients to customise and diversify their portfolios using the dollar-cost averaging technique. For example, consider an initial investment of US$100 split between Berkshire Hathaway (BRK-B), NVDA, TSLA, AMZN, and APPL. Of the total, US$50 was allocated to BRK-B while the remaining US$50 was evenly distributed among some of the magnificent seven stocks. Assuming purchases were made from the start of the year until the end of March, the year-to-date (YTD) performance shows an estimated growth of 16.79%.

One Dollar at a Time: The Potential of Fractional Shares


Geographic Diversification in Portfolio Management

Investors often turn to geographical diversification as a risk management strategy, using Exchange-Traded Funds (ETFs) to achieve this goal effectively. The chart illustrates an example where an initial capital of US$100 is evenly distributed across four distinct ETFs: Vanguard FTSE European ETF (VGK), SPDR S&P 500 ETF (SPY), iShares MSCI India ETF (INDA), and iShares MSCI China ETF (MCHI). The estimated YTD performance from January 2024 to the end of March 2024 reflects a notable growth of 5.94%, highlighting the potential benefits of geographic diversification in portfolio management.

One Dollar at a Time: The Potential of Fractional Shares


Enhancing Portfolio Flexibility and Diversification

Leveraging the flexibility and diversification benefits of ETFs allows younger investors to tailor their risk management strategies across multiple products. A popular approach is the classic 60/40 portfolio allocation, distributing 60% to equities and 40% to bonds or other fixed-income assets. However, by incorporating commodities, such as gold, into their portfolios, investors can add an extra layer of diversification and potential stability.

An example of the model portfolio as seen above explores the concept of a 60/20/20 allocation. This approach allocates 60% to equities, 20% to bonds, and 20% to gold, utilising the three ETFs: Vanguard Total Stock Market Index Fund (VTI), Vanguard Total International Bond Index Fund (BNDX), and SPDR Gold Shares (GLD). This diversified portfolio has a notable performance of 8.02% YTD performance from January 2024 to the end of March 2024.


Small Change Big Impact

With the innovative concept of DCA and consistent investment, even a dollar a day can significantly alleviate financial concerns. Starting early and investing a fixed amount every month can foster habits of budgeting, planning, and prioritising savings over discretionary spending among the younger generation. Similarly, parents who wish to invest for their children, may adopt the DCA strategy and create a diversified portfolio for them. Starting early would also help to educate individuals about the financial markets, investment strategies, and long-term financial planning, instilling a mindset of abundance rather than scarcity. Thus, the younger generation will not only secure their financial future but also embark on a journey of self-empowerment and financial liberation.

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