It is wise to reduce your costs of investing. Every dollar you pay in fees is simply a dollar that cannot grow to ten dollars over time. You are using the services of others so you need to pay something, but there are smart things you can do to reduce the costs of investing.
Not too long ago, investing was seen as something expensive. Only the rich could invest their money. In fact, in the 19th century, these people were typically called “robber barons” at the worst and “capitalists” at the best. We live in a capitalist world (even if you are reading this in a country other than the USA) so investing is important way to provide for your family. The costs of investing have dropped over the years, but spending money needlessly is never wise.
It only makes sense to reduce the costs of investing and do it well. Investing is something almost anyone can do.
However, investing can still get expensive. If you pay relatively high investing costs, usually due to fees, commissions, expense ratios, and taxes, you could see lower overall returns. If you want to reduce the costs of investing, here are some suggestions:
1. Know what the costs are so that you can reduce the costs of investing
The first step to reduce the costs of investing is know what you’re paying in terms of investment costs and fees. Disclosures on your 401(k) statement should tell you exactly what you are paying. It’s also a good idea to get some help looking over the tax implications of your investing strategy, to see where you could save. Know the fees you are paying at your brokerage, and be ready make changes as necessary.
For individual stocks that you buy (this should be approximately 60-70% of your portfolio), you really need to understand the brokerage fees that you pay.
2. Comparison shop to find better rates
You do not need to be loyal to your current broker. If your broker is not earning his/her fee then change brokers to reduce the costs of investing. For some thoughts on finding a broker, read this article.
Now that you know what you are paying in fees, you can comparison shop. If you are paying $9.95 for a stock trade, you should probably know that there are brokers that charge much less, some as little is $4.95. Take the time to look for brokers and investments that come with lower costs. From brokers that will let you reinvest dividends without paying transaction fees, to no-load mutual funds, look for the best deals. When you find a better price, replace your old, more expensive investment, with a new, less expensive asset.
I have a list of brokers on this page, if you need help in looking for alternatives.
3. Consider buying index fund to reduce your costs of investing
If you buy actively managed funds, you should consider index funds. Index funds usually come without sales load fees, and often have much lower expense ratios. If you really want to have low expense ratios, you can consider an index ETF. There are ETFs with expense ratios as low as 0.04%. That’s an amazing way to save money on fees, especially over time, as your portfolio grows.
I have discussed having a balanced portfolio before on this site. I strongly suggest that you do not use actively managed funds but instead have 30-40% of your portfolio in 4 index funds. The balance should be in great stocks such as those I have on my Watch List. Not only will index funds reduce your costs of investing but they will likely earn your more in return.
4. Look for no-cost options to reduce your costs of investing
For investors who are interested in funds, it’s possible to avoid paying commission/transaction costs. Many brokers have a selection of funds that are no-cost, meaning that you won’t pay a transaction fee when you buy shares. You still have expense ratios, so pay attention to that information, but you won’t have to worry about transaction costs. Many brokers also offer commission-free ETFs, so you can take advantage of the low expense ratios.
Consider your options at different brokers, and pay attention to minimums and other account requirements. Also, realize that your selection of commission-free funds might be a little limited. Don't let your goal to reduce your costs of investing affect your ability to make a sufficient return on that investment.
5. Move your money to a tax-advantaged account to avoid the tax penalty costs
If you are concerned about how much you have been paying in taxes, you can move your money to a tax-advantaged account. Traditional accounts, like 401(k)s and IRAs, grow tax-deferred, meaning you get a tax deduction for your contributions now, and you aren’t taxed on your earnings until later. This allows your money to stay in your account and grow more efficiently, since you aren’t taxed immediately.
It can also make sense to use an account where your money grows tax-free. Roth IRAsÂ and Roth 401(k)s require that you make contributions after you pay your taxes. However, the money in these accounts grows tax-free; you are never taxed on your earnings. Many investors like to hold dividend stocks and Treasury securities in Roth accounts because the interest/payouts from these investments are never taxed. This can be a way to lower your investing costs over time.
I suggest that you seek advice from a qualified tax professional to understand how your investment activity affects your taxes. Don’t trust the advice of an article (even one written by me) as your situation may be unique.
My book, The Confident Investor, features a system to increase your wealth while trying to avoid unnecessary costs. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.
Reduce your costs of investing. It is simply the prudent thing to do. Don’t spend more money than you need to spend.
Wall Street Bull photo provided on Flickr by thenails