# Costs of Stocks and etfs



## saifq (Oct 24, 2012)

Would buying individual stocks have a lower cost than etfs (only MER) because you buy a stock once whereas your total assets are subject to an MER every year? I created a spreadsheet to calculate the present value of costs for investing $10000 in a 0.30% MER fund (I just chose random variables here), 5% expected return and 2.5% inflation for a period of 30 years and got around $2700!!! I can't attach the file here but essentially what I did was I calculated the cost for the next 30 years (inflation adjusted to today's dollars) and also added the opportunity cost of not investing these costs. I might have made an error in this calculation but it seems like the costs of a well diversified portfolio of stocks would be way under that even if i have monthly contributions! Of course this would only be for long term investors but the costs are high even if I look at 10 years.

Also, my second question (i haven't run the numbers yet) but is it better to keep capital gains inside tfsa than rrsp since you are taxed on all gains when you withdraw the money whereas in tfsa (even though you start off with tax paid dollars) you wont have to pay taxes again on any gains?

Thanks!


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## Squash500 (May 16, 2009)

saifq said:


> Would buying individual stocks have a lower cost than etfs (only MER) because you buy a stock once whereas your total assets are subject to an MER every year? I created a spreadsheet to calculate the present value of costs for investing $10000 in a 0.30% MER fund (I just chose random variables here), 5% expected return and 2.5% inflation for a period of 30 years and got around $2700!!! I can't attach the file here but essentially what I did was I calculated the cost for the next 30 years (inflation adjusted to today's dollars) and also added the opportunity cost of not investing these costs. I might have made an error in this calculation but it seems like the costs of a well diversified portfolio of stocks would be way under that even if i have monthly contributions! Of course this would only be for long term investors but the costs are high even if I look at 10 years.
> 
> Also, my second question (i haven't run the numbers yet) but is it better to keep capital gains inside tfsa than rrsp since you are taxed on all gains when you withdraw the money whereas in tfsa (even though you start off with tax paid dollars) you wont have to pay taxes again on any gains?
> 
> Thanks!


Short answer....it depends how much money you have. My investing idol....John DeGoey... says that in his opinion you need at least $1 million in investable assets in order to invest in individual stocks in order to be properly diversified. Anything below $1million--your better off investing in ETFS.

It would be lower on a cost basis just to invest in individual stocks on an MER basis but you also have a chance to lose a lot more money buying individual stocks as opposed to buying ETFS. With ETFS....your not exposed as much to gambler's ruin.

IMHO it's better to keep all your capital gains inside an RRSP as opposed to a TFSA....because you can defer the capital gains accumulated in the RRSP for a very long period of time. Hopefully when your ready to convert your RRSP to a RRIF you will be at a much lower marginal tax rate then you are now.

I believe when it's time to withdraw your money from an RRSP or a RRIF it's taxed as interest income anyway.


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## BigMFfan (Feb 23, 2013)

saifq said:


> Would buying individual stocks have a lower cost than etfs (only MER) because you buy a stock once whereas your total assets are subject to an MER every year? I created a spreadsheet to calculate the present value of costs for investing $10000 in a 0.30% MER fund (I just chose random variables here), 5% expected return and 2.5% inflation for a period of 30 years and got around $2700!!! I can't attach the file here but essentially what I did was I calculated the cost for the next 30 years (inflation adjusted to today's dollars) and also added the opportunity cost of not investing these costs. I might have made an error in this calculation but it seems like the costs of a well diversified portfolio of stocks would be way under that even if i have monthly contributions! Of course this would only be for long term investors but the costs are high even if I look at 10 years.
> 
> Also, my second question (i haven't run the numbers yet) but is it better to keep capital gains inside tfsa than rrsp since you are taxed on all gains when you withdraw the money whereas in tfsa (even though you start off with tax paid dollars) you wont have to pay taxes again on any gains?
> 
> Thanks!


I'm sure that your analysis is correct, at least as far as the conclusion is concerned. That is why I moved from ETF's to individual stocks as my portfolio value has increased. Paying even 0.3% now would be many times more than the amount that I spend in commissions per year under my buy and hold strategy. ETF's definitely have their place/use though, as the added cost may be worth it to those interested in more passive investing. 

As for your second question, I believe it depends on a number of factors, including the type of investment, how long are you going to hold it, how likely a significant gain is vs a possible loss or vs other types of income the investment may produce, and what your marginal tax rate currently is and might be when you realize the gain. If I had a sure thing, short-term double, I'd put it in my TFSA, but because I'm not so fortunate, I tend to allocate my investments based on their type and the type of income they produce (the things I know or can reasonably predict).


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## fatcat (Nov 11, 2009)

http://www.ndir.com/cgi-bin/ETFsVsStocks.cgi


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## Squash500 (May 16, 2009)

fatcat said:


> http://www.ndir.com/cgi-bin/ETFsVsStocks.cgi


 Thanks for providing that link FC. Much appreciated.


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## Lephturn (Aug 31, 2009)

fatcat said:


> http://www.ndir.com/cgi-bin/ETFsVsStocks.cgi


Interesting breakdown, but only valuable in so far as you plan to completely replicate the index.

Try changing the settings on that page so that you only take the top 25% or 50% of the largest stocks on those lists and you get a very different picture.

Personally I'm more fond of choosing fewer solid dividend paying stocks in diversified sectors and protecting them with options strategies. Recent drops/crashes in the markets have highlighted the problem with diversification - it tends to work best when the markets go up. When there are major market events all those things that were uncorrelated or inversely correlated all seem to line up and go down together. For me that has reducing volatility through options strategies instead of massive diversification - a nice side effect is much lower costs.


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## humble_pie (Jun 7, 2009)

saifq said:


> Would buying individual stocks have a lower cost than etfs (only MER) because you buy a stock once whereas your total assets are subject to an MER every year?



holding relevant stocks at no charge instead of paying an etf mer is only one reason to avoid at least some etfs, at least some of the time.

but the principal reason to own stocks directly - if one has a large enough account to be able to diversify - is to avoid the losing stocks that inevitably belong in an etf's index.

this brings us to the neverending argument. You can't avoid losing stocks, says the couch potato lobby. You can only subject yourself to the vagaries of a market's index, they say.

however, one has to notice that nearly all the diehard potatoes in this forum (there are a few exceptions) appear to also be gobbling up individual stocks or options like they're going out of fashion. Apparently preaching couch potato is a question of Do What We Say, Not What We Do.

meanwhile, the stock picker lobby is running around insouciantly buying up & selling its favourite individual common shares, sometimes even several times a day. It's not known if they really do make any money. The potatoes like to say that the pickers are just out having a frivolous blast.

then there are sub-cults like dividend investors, preferred share fans & option players. There are even math geeks who pepper their posts with alphabet soup like XIRR, CAGR, 100Δ & FV=P x (1+R)n !


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## andrewf (Mar 1, 2010)

Only taking top 25% means sacrificing a lot of diversification benefit for a very small % saving in cost.

And yes, while things are correlated in the short term, longer term returns are driven by the underlying businesses.


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## andrewf (Mar 1, 2010)

humble_pie said:


> holding relevant stocks at no charge instead of paying an etf mer is only one reason to avoid at least some etfs, at least some of the time.
> 
> but the principal reason to own stocks directly - if one has a large enough account to be able to diversify - is to avoid the losing stocks that inevitably belong in an etf's index.
> 
> ...


Perhaps instead of putting words in others' mouth, speak for yourself. Strawmen are fun to beat down, but the act benefits no one.


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## Squash500 (May 16, 2009)

humble_pie said:


> holding relevant stocks at no charge instead of paying an etf mer is only one reason to avoid at least some etfs, at least some of the time.
> 
> but the principal reason to own stocks directly - if one has a large enough account to be able to diversify - is to avoid the losing stocks that inevitably belong in an etf's index.
> 
> ...


 HP why do you continuously have to be such a financial bully? We get it....Your the next Warren Buffett. I think your discouraging people from posting on this forum because their afraid of your sarcastic condescending wrath. Personally....you just make me laugh but I'm afraid that some of the other forum posters might actually take you seriously--LOL.


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## andrewf (Mar 1, 2010)

No, Squash, I'm the bully. I'm stalking her, supposedly.


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## humble_pie (Jun 7, 2009)

squashie soon you are going to be another little belguy


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## Squash500 (May 16, 2009)

humble_pie said:


> squashie soon you are going to be another little belguy


What does that mean?


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## Four Pillars (Apr 5, 2009)

Where is Belguy? I miss him.


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## Toronto.gal (Jan 8, 2010)

It has been promoted/suggested numerous times here, that the learn little & sit back couch potato approach, is the one & only winning strategy, but that active investing is a losing proposition & big waste of time. 

The argument is, and always will be never-ending indeed, but that is fine; to each his/her own! However, it seems perfectly acceptable to often criticize & even ridicule the stock pickers here, but somehow, the mostly constructive criticism given to the so called 'lazy' portfolios is not.


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## Toronto.gal (Jan 8, 2010)

Four Pillars said:


> Where is Belguy? I miss him.


I asked that question before you did [under his most famous thread]. 

Let's hope that he's just busy with his taxes & that he's alright!


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## Squash500 (May 16, 2009)

Toronto.gal said:


> It has been promoted/suggested numerous times here, that the learn little & sit back couch potato approach, is the one & only winning strategy, but that active investing is a losing proposition & big waste of time.
> 
> The argument is, and always will be never-ending indeed, but that is fine; to each his/her own! However, it seems perfectly acceptable to often criticize & even ridicule the stock pickers here, but somehow, the mostly constructive criticism given to the so called 'lazy' portfolios is not.


 I'm just on this forum to learn. IMHO both active management and passive management have merit. Personally I would never pay a financial advisor even one cent (now a nickel) to manage my portfolio.


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## Toronto.gal (Jan 8, 2010)

Just to clarify Squash, I was talking about DIY investing.

I had an FA for many years, because there was a time when I had no time [ie: excuse] nor interest in learning/handling my portfolio myself. But as the saying goes, never too late to turn over a new leaf for anyone!


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## Squash500 (May 16, 2009)

Toronto.gal said:


> Just to clarify Squash, I was talking about DIY investing.
> 
> I had an FA for many years, because there was a time when I had no time [ie: excuse] nor interest in learning/handling my portfolio myself. But as the saying goes, never too late to turn over a new leaf for anyone!


 IMHO DIY investing with ETFS is the easiest way to go out on your own. It's usually when you start getting into investing in individual stocks that financial advisors become more necessary. However even Blackrock (ishares) is conceding that some people might not be happy with totally passive management....that's why they sometimes advocate "core and explore."


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## My Own Advisor (Sep 24, 2012)

I think there's tons of merit for the "core and explore", probably because it has more psychological benefits that anything else since I question whether most people have the discipline to stick to just 3 or 4 broad-market ETFs for decades on end; as in, investing cannot be _this simple. _ 

I'll be honest, I'm guilty of this as well.


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## Squash500 (May 16, 2009)

My Own Advisor said:


> I think there's tons of merit for the "core and explore", probably because it has more psychological benefits that anything else since I question whether most people have the discipline to stick to just 3 or 4 broad-market ETFs for decades on end; as in, investing cannot be _this simple. _
> 
> I'll be honest, I'm guilty of this as well.


I totally agree with you MOA. Another reason is that it's just plain boring to hold only 3 or 4 broad-market ETFS for years on end--LOL. What I've started to do is to devote 10% of my portfolio to investing in individual stocks and the rest of it in ETFS. I'm probably going to day-trade or swing trade some of these individual stocks as well. Just for a bit of variety etc.


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## m3s (Apr 3, 2010)

Squash500 said:


> Short answer....it depends how much money you have. Anything below $1million--your better off investing in ETFS.
> 
> IMHO it's better to keep all your capital gains inside an RRSP as opposed to a TFSA....because you can defer the capital gains accumulated in the RRSP for a very long period of time. Hopefully when your ready to convert your RRSP to a RRIF you will be at a much lower marginal tax rate then you are now.
> 
> I believe when it's time to withdraw your money from an RRSP or a RRIF it's taxed as interest income anyway.


I don't follow the logic

RRSP capital gains are all taxed as income after it's compounded for years.. TFSA capital gains are taxed zilch nada nothing ever? Surely I'm missing something? I suppose it depends, if you have substantial capital gains relative to the original investment it's much better in a TFSA

I started with about ~ 20x ~$2k individual stocks and I kept the fees far below 1%. I'm leaning into some ETFs now as I don't have the time to diversify into foreign markets I don't fully understand

What I found was foreign ETFs are tax disadvantaged as they are shelled inside of US ETFs so the foreign tax credit is buried beyond our reach. I suspect the magic number is far below $1 mil myself

I think it depends on the investor. If you're not interested in the economy, buy ETFs. If you are, consider individual stocks. I'm spanking my couch potato benchmark so far, because I saw the potential of some obvious technology


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## andrewf (Mar 1, 2010)

Lots of investors who are interested in the economy underperform the index, _necessarily_.


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## Squash500 (May 16, 2009)

mode3sour said:


> I don't follow the logic
> 
> RRSP capital gains are all taxed as income after it's compounded for years.. TFSA capital gains are taxed zilch nada nothing ever? Surely I'm missing something? I suppose it depends, if you have substantial capital gains relative to the original investment it's much better in a TFSA
> 
> ...


IMHO it depends on the investor. The key IMHO is not to pay a financial advisor at all. An investor could buy XIU, XBB, and XSP....have no interest in the economy whatsoever and do better then a lot of Harvard and Yale educated financial gurus. What other field would this be possible in?


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## andrewf (Mar 1, 2010)

^I agree that the important thing is to invest at low cost. Approximating index investing by holding individual securities is probably fine on average, but to think you're going to add much value long term with equivalent risk is probably wishful thinking.


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## purple.platypus (Dec 10, 2012)

mode3sour said:


> I don't follow the logic
> 
> RRSP capital gains are all taxed as income after it's compounded for years.. TFSA capital gains are taxed zilch nada nothing ever? Surely I'm missing something? I suppose it depends, if you have substantial capital gains relative to the original investment it's much better in a TFSA


Exactly my thought on that passage. With an RRSP, you can kick the can down the road, which is good for some people, less good for others. With a TFSA you can _disintegrate the can_. Even for the people for whom RRSPs are clearly beneficial, the TFSA is still better to the extent that avoiding capital gains taxes is your goal. (That doesn't mean it's always better all things considered, but it's enough to make that paragraph of Squash's post very strange.)

One thing about the TFSA that I can see being a pain for many here - not me, I'm still too small a fish (er, platypus I guess) for it to matter - is the relatively low contribution limit, but that will change over time. Thanks to that, some here will have _no choice_ but to have at least some of their capital gains elsewhere. But to the extent you can, I am a big fan of putting those in TFSAs.


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## andrewf (Mar 1, 2010)

Some math.

Let t_i is your current tax rate, and t_f is your tax rate at withdrawal.
Assume we have a TFSA and RRSP with equivalent after tax contributions of $1000 in year 1. Further assume both are fully invested for 30 years at 8% compounded capital gain. At the end of 30 years, the resulting account balance is withdrawn at the applicable tax rate.

RRSP:

$1000 * 1.08^30 *(1-t_f)/(1-t_i) = $10,062 * (1-t_f)/(1-t_i)

TFSA:

$1000 * 1.08^30 = $10,062

Non-registered

(($1000 * 1.08^30) - $1000)*(1-t_f/2) +1000 = $9,062 * (1-t_f/2) + $1000

Conclusions:

1. If t_i=t_f, then RRSP and TFSA are equivalent for capital gains income. If t_i>t_f, RRSPs are better than TFSA, and if the converse is true, TFSAs are better than RRSPs. 

2. If t_i=t_f>0, RRSPs and TFSAs are both better than non-registered. Your final tax rate has to be about double your initial tax rate for non-registered to beat RRSP.


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## purple.platypus (Dec 10, 2012)

(never mind)


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## liquidfinance (Jan 28, 2011)

mode3sour said:


> I don't follow the logic
> 
> RRSP capital gains are all taxed as income after it's compounded for years.. TFSA capital gains are taxed zilch nada nothing ever? Surely I'm missing something? I suppose it depends, if you have substantial capital gains relative to the original investment it's much better in a TFSA


So Capital Gains actually receive less favourable tax treatment inside an RRSP as you will eventually be taxed on 100% of the capital gain at your marginal rate as opposed to 50% if you held them in a non registered account.

Is that correct?


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## andrewf (Mar 1, 2010)

Nope. See math above.


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## m3s (Apr 3, 2010)

It's depends on your interpretation of the OPs question. Where to put capital gains? TFSA or RRSP?

I choose to put my capital gains in TFSA first, because it will never be taxed again for certain. RRSP will be taxed 100% in the distant future at god knows what tax rate. Better to put income/interest in RRSP that would be taxed 100% anyways and likely won't be as much. I don't like foreign ETFs as I can't pick and choose the tax efficient country I want to invest in, and all foreign tax credits are lost or too complicated inside an ETF and foreign tax credits are always lost inside an RRSP (except US) So it's not as simple as comparing marginal tax rates

Short answer is it's complicated and depends on many things


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## humble_pie (Jun 7, 2009)

mode3sour said:


> It's depends on your interpretation of the OPs question. Where to put capital gains? TFSA or RRSP?
> 
> I choose to put my capital gains in TFSA first, because it will never be taxed again for certain. RRSP will be taxed 100% in the distant future at god knows what tax rate. Better to put income/interest in RRSP that would be taxed 100% anyways and likely won't be as much. I don't like foreign ETFs as I can't pick and choose the tax efficient country I want to invest in, and all foreign tax credits are lost or too complicated inside an ETF and foreign tax credits are always lost inside an RRSP (except US) So it's not as simple as comparing marginal tax rates
> 
> Short answer is it's complicated and depends on many things



hear, hear.

all this is correct, of course.

a good tfsa strategy for those who could tolerate the risk was to drive the tfsa steadily forward, right from Day One in january 2009, towards capital gains only.

this is still a good strategy imho, but it definitely means risky investments. There is also the downer that any losses that might be incurred cannot be deducted. Investors need sea legs.

a somewhat lower level of risk could be achieved with good dividend payors that also have options to sell. Many here like husky oil. I happen to prefer cpg. Taking risk down a couple of notches further means banks or telcos with options as well as good dividends.


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## andrewf (Mar 1, 2010)

I wouldn't let the withholding tax tail wag the investment dog. If you have unused registered account space, it nearly always makes sense to use it rather than invest through non-reg.


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## andrewf (Mar 1, 2010)

mode3sour said:


> It's depends on your interpretation of the OPs question. Where to put capital gains? TFSA or RRSP?
> 
> [...]
> 
> Short answer is it's complicated and depends on many things


It's really not that complicated.

It gets complicated when you run out of TFSA/RRSP room. While you have it, it's pretty simple beside some very minor tinkering at the edges.


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## My Own Advisor (Sep 24, 2012)

So andrewf, you'd advise registered investments over non-registered all the time? I can see this for the high-income earner in top tax bracket but other tax brackets as well?

Curious...

Also, do you manage your portfolio this way as well? (registered = priority over non-registered?)


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## MrMatt (Dec 21, 2011)

andrewf said:


> Only taking top 25% means sacrificing a lot of diversification benefit for a very small % saving in cost.
> 
> And yes, while things are correlated in the short term, longer term returns are driven by the underlying businesses.


According to several studies you only need a dozen stocks to "diversify" out the risk.

I think core+explore is just fine, and a dozen stocks at $5k positions is only $60k.


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## andrewf (Mar 1, 2010)

MrMatt said:


> According to several studies you only need a dozen stocks to "diversify" out the risk.
> 
> I think core+explore is just fine, and a dozen stocks at $5k positions is only $60k.


I've seen a study that indicates the minimum number of stocks needed to approximate the market has been growing. Maybe it was 12 30 years ago. I've seen numbers upwards of 40...

Take it with a grain of salt. You can never be sure you'll get a market return unless you hold the market. If you happen to have an Enron, it can blow a giant hole in your portfolio.


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## andrewf (Mar 1, 2010)

My Own Advisor said:


> So andrewf, you'd advise registered investments over non-registered all the time? I can see this for the high-income earner in top tax bracket but other tax brackets as well?
> 
> Curious...
> 
> Also, do you manage your portfolio this way as well? (registered = priority over non-registered?)


I'm just doing the math to clarify my thinking on the subject. It seems pretty clear to me that you should always use 100% of your TFSA room before investing non-reg. You should also use all of your RRSP room unless you expect to be in a higher tax bracket for the rest of your life. And even if you do so expect, it might still be advantageous to invest in RRSP over nonregistered, due to tax-free compounding of cash flows (dividends, interest). A higher slightly higher compounding rate over time can add up to a big benefit, even if you are taxed at a higher rate than when you contribute.

As far as my personal accounts, I have maxed by TFSA, made pretty good headway on my RRSP (even though I'm not in the 46% tax bracket...  ). I do have a small margin account with IB so I can employ leverage at a reasonable cost, as I don't have a home to use as collateral. I'm currently using an ETF in the margin account, but I may at some point go to individual equities.


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## Cal (Jun 17, 2009)

This thread made me wonder, does anyone know what the difference would be of dripping an etf that pays a 3% distribution per year, but the distribution is paid 2x year (June/Dec) vs a stock that also pays a 3% dividend but it is paid out monthly and is also dripped?

They wold both pay out the same annually, however the monthly stock would allow for more (and again I am thinking fractional shares) frequent accumulation.....


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