Earlier this week, my colleague Chong Ser Jing shared a piece of really exciting news from stock exchange operator Singapore Exchange Limited (SGX: S68): From 19 January 2015 onwards, individual investors would be able to buy in standard board lot sizes of 100 units instead of 1,000 units. This has been a change which has been eagerly awaited by many Foolish folks, including myself. So, with the “sea of change” coming in another five months or so, the next question from individual investors may be this: How can this change actually help me invest better? Let’s run…
Earlier this week, my colleague Chong Ser Jing shared a piece of really exciting news from stock exchange operator Singapore Exchange Limited (SGX: S68): From 19 January 2015 onwards, individual investors would be able to buy in standard board lot sizes of 100 units instead of 1,000 units.
This has been a change which has been eagerly awaited by many Foolish folks, including myself. So, with the “sea of change” coming in another five months or so, the next question from individual investors may be this: How can this change actually help me invest better?
Let’s run through the benefits
To answer that question, I would like to refer to Step 10 of a Foolish series of articles that we call the 13 Steps To Financial Freedom. In particular, I would focus on two elements within Step 10 which ties into how the change in the board lot size will help individual investors.
a) Buy shares in solid businesses
At the current state (1,000 unit lot size), individual investors may need to first look at the share price of a company to determine if they are able to afford it. Looking at the share price, however, should not be your focus if you’re a Foolish investor.
As Foolish investors, we like to focus on buying businesses, and not tickers. Hence, with the change to the 100 unit lot size, we can now focus on the company’s business rather than worry about how much its shares are going to cost.
For instance, the change would make it much more affordable for any investor to consider owning a stake in companies like Jardine Matheson Holdings Limited (SGX: J36) and Jardine Strategic Holdings Limited (SGX: J37). Both shares might appeal to individual investors who favour companies with solid long-term track records. But at their current share prices of around US$60 and US$36, respectively, it’s hard for an individual investor with a smaller portfolio to afford their shares before the board lot size reduction kicks in.
b) Spread out your risk (buy in thirds)
Having a smaller board lot size makes it a lot easier for investors to “buy in thirds.” As a quick reminder, “buying in thirds” is described in Step 10 as follows:
“Simply divide the total dollar amount you want to devote to a particular investment by three, and pick three different points in time to add to your position.”
It can be a great way for a new investor to start out. If you’re someone new, the share market can seem to be a scary place and this is where smaller allocations can help.
With smaller allocations, a new investor might be able to stay focused on holding for the long term as short term market declines would likely not induce any panicked selling given the lower dollar amounts involved. In addition – and more importantly – buying with smaller allocations can help a new investor tune out the noise from the share market and instead, study companies over time with the goal of acquiring more company-related investing knowledge.
As time passes, and you observe an increasing number of companies, the acquired knowledge may just help inform you on the companies that are doing the best and will continue to do the best, hence improving your chances of making great investments.
In all, the main benefit of smaller allocations in shares might just be the peace of mind that allows investors to slowly ease into the share market. But why is this peace of mind important? Take it from Warren Buffett. The billionaire investor was once asked why so few investors are able to replicate his success. His reply?
“The reason gets down to temperament”
If you, as an investor, are able to use smaller positions to achieve the temperament that Buffett speaks about (a big part of which involves buying and holding great companies for the long term), you may just stand a better chance of outperforming the market.
So besides widening the choices of companies in which you can afford, the reduction in the board lot size can also play a role in helping you become an investor with better temperament.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.