First trades and first mistakes. ETF Investing Part 2

Well after spending months reading about ETF's, how to build a balanced portfolio, about asset allocation and about keeping expenses low in your portfolio I made my first trades. I created a balanced model portfolio on the Money Observer website which has all the allocations for each of the different asset classes and the further diversification within those asset classes as discussed in my first post.

I did 3 trades, all for lots of about £300 - £400 each. The 3 trades were into ETF's covering emerging markets, corporate bonds and an Asian high yield dividend ETF. All 3 were on buy signals according to my trading system. However I soon realised that after building in the trading cost of £12.95 per buy trade that is was going to take me a long time to make any sort of decent returns when my trading costs were so high compared to the size of my trades. Moral of my story from the first 3 trades is that small retail investors not only need to worry about ongoing management costs and account administration fees they also need to take into account in a major way the affect of transaction costs on their investment returns when doing their trades until they have a reasonably sized portfolio.

To that end I have decided not to do any more trades until I have saved up enough money to ensure that the transaction costs do not exceed more than 1% of the total traded amount. This is a lesson hard learned but something all small investors need to take heed of. Going forward I am going sacrifice some underlying diversification in the various asset classes in my portfolio until my portfolio gets a bit larger so that when I do decide to allocate say 5% to green energy in order to further the diversify the equity part of my portfolio the trade will actually be a meaningful trade and one where trading costs will have a minimal impact on the returns of this allocation.