AUTOMATIC WEALTH BUILDING WHILE CUTTING INVESTMENT COSTS

I just finished reviewing my investment strategy for my taxable investment portfolio, and came up with an idea to increase my cash holdings, boost the number of shares I own overall and cut costs at the same time.  Sound too good to be true?  On the contrary.  Here's how I did it: 

In my taxable investment portfolio I hold investments in total of 25 dividend paying stocks and funds.  My investment company (ING Sharebuilder) allows free reinvestment of dividends.  So I set 8 of my stocks to reinvest dividends automatically (at no cost) for a total of 56 investments per year, or roughly 4.67 investments per month.  For the remaining 17 stocks in my portfolio, I'm having the dividends paid in cash, for a total of 68 dividend payments per year, or 5.67 dividend payments per month.  Since I'm paying nothing for reinvested dividends, I'll be reducing costs by eliminating commissions on stock purchases altogether.  At the same time, I'm building my cash position by continuing to collect the balance of dividend payments as cash, paid to my money market account.  I'll still have to pay purchase commissions on new investments and commissions on sales, but I should see a significant increase in holdings while also benefiting from greatly reduced costs.  

As a tweak to the system, I'm also reinvesting in stocks which I believe have good long term prospects but are currently selling below my original purchase price.  Reinvesting dividends in these holdings will have the added benefit of reducing cost basis and adding to overall returns in my portfolio.  

SPEAKING OF PROCESSES

Yesterday I wrote about wealth building being a simple process. The process I've chosen for building wealth involves investing in dividend paying stocks. In previous posts I wrote about my investment plan for 2010 and how I'd changed my strategy to increase cash and reduce investment costs. It seems to be working out well so far. I directed my online broker to reinvest dividends on some of my core stocks like Clorox, British Petroleum, Merck and a few others. This has helped reduce my costs, since there are no commissions on reinvested dividends, while allowing me to increase my holdings. I've also continued to invest monthly in my IRA account to help reduce taxable income and continued increasing my investments in limited partnerships, which are also tax advantaged, in my regular investment accounts.

My cash levels continue to increase from dividend income building up in my money market accounts. I also received a nice raise at work and will be adding extra cash to my savings and checking accounts as well.

So overall my investment plan for 2010 is working out quite well so far. I'll make adjustments along the way, but the basic plan is in place and it looks as though I'll be able to reach most of my goals for the year, even if there are some setbacks along the way.