Minimum portfolio size to have 100% individual equities/bonds

When I first started off in retail financial services, the typical client had 50k to 1M investable assets. For the small clients, the firm would put them into some ETFs and mutual funds.

One coworker claimed that a client should have minimum $500,000 in the portfolio before picking individual stocks (companies, not ETFs). His rationale was that in order to have a sufficient amount of diversification, you had to have X number of individual companies, and if you had laddered orders, you’d get killed by the transactions costs in a small portfolio.

500k was his number. What’s yours?

Furthermore, I don’t have a lot of experience with fixed-income. One CFA from Principal made a comment to the tone of "ther’es no way any fund could justifiy its administrative expenses when peopel can just buy AGG (bond ETF with ishares based off Lehman bond index?). To put things in perspective, the annual fee is 0.08%. So a 1,000,000 client portfolio that is earmarked for 100% fixed income will be charged $800 in management fees.

Hypothetically, what if an individual wanted to forego AGG and handpick his own fixed income instruments? How would that even work? Would he save on fees? Would the buy-in price be low enough that he could achieve a geographic, length, industry diversification? How big would a fixed income portfolio need to be if he went that route?

Every time you buy/sell a bond, you pay a commission. Even if it’s a low commission, if yields are only 2-3%, then to make a round trip, you might shave off a year or two worth of yield.

Personally, I don’t think I would ever hand-pick my own bonds. Mutual funds/ETF’s are the way to go.

I’d say $100,000 is enough to get started. Of course more is always better but assume u have 100% equities, u could invest in 20 stocks for $5000 each. We are talking about minimum here. As for adding fixed income, up that to $150,000. Buying your own fixed income investments is more expensive but is better for older clients. Plus, bond funds have ultra low expense ratios but look at their returns (in general). Anything fixed income nowadays is tough though.

I just found this link:

If the trading cost is 1 dollar each way, and the bond price is 5000, that’s not so bad then right? What kind of upside are we talking on a 5000 dollar bond? But yeah I agree with you that if the bond is for like 500 bucks this is horrible.

Did you see the “minimum $10”? On a $1,000 bond, that’s 1%, or 2% for a round-trip (to buy and to sell). If bonds are yielding 4%, then that’s six months worth of income.

Plus, that’s in addition to any markup that’s already included in the price, if any. If the hidden costs are $20, then that’s a $30 charge. That’s 3%, or 6% round-trip. That seriously eats into your return.

(Don’t know what “hidden costs” are? You’ll find out at Level 3.)

It states

$1 per bond, $10 minimum,

So we’re assuming that you’re buying 10 bonds at once to reduce the costs. I should have clarified that I wasn’t advocating buying 1 bond and paying the full $10

In any case, your point still stands. I guess this would only work with either A) an ETF or B) a brokerage house with significantly lower fees. I asked in another thread about Interactive Brokers and some of you have confidence in that place.

^ I think that’s $1/$1000 to a minimum of $10. Not 10 seperate names. Those would be commissioned seperately, at least from my experience. All the bond brokers up here have a minimum $5k face per trade too as well. Not sure if that’s the same down south.

Bond holdings benefit signficantly from diversification. There is little variance in bond returns between companies (let’s assume we’re talking a corporate fund), until one company goes pop. Then it’s a potentially huge loss. This isn’t relevant in most cases, unless one of your five or ten bonds goes pop. Then you’re hosed.

I’d stick to an low cost bond ETF for fixed income, unless (a) you’re playing the high yield market and (b) you have sufficent credit research skills to find alpha in that market. There I think there is sufficent opportunity to take on the risk of being less diversified. I have no evidence of that other than my personal feelings though.