It’s difficult enough to earn a better than market return. In fact, 86% of active investment managers fail to beat average market returns, after fees. (Not lying.) And these are people paid good money to do this!
(Index funds may not be a full proof solution either, but are among the best options for Regular Joes and CentsAndSense people.)
In any case, two things we can all do to give ourselves the best chance to meet or beat the market are 1) reduce our tax burden; and 2) reduce your fees.
The other thing you should do is reduce your fees. Here’s why.
In this example, we’re assuming zero investment returns to illustrate an extreme, and a $10/trade fee. $10 can’t hurt that much right? Let’s see.
Even one round trip trade costing $20 puts a $500 position -4% when the average stock market return is only 7%. Now, you have to do at least 57% better than the market in order to beat it — and 86% of active managers fail!
After just 10 buy and sell transactions, a $500 position shrinks 40% to $300, assuming you didn’t lose or make money with your investments.
And ten round-trip trades aren’t that much, at Ameritrade, customers are trading on average above 17 trades per year.
Thankfully, there are low cost and practically no-cost brokers out there that you can use. In my non-retirement accounts, I use Robinhood, which only charges you a fee if you want to borrow money and margin your account. Otherwise, most trades are free, even when you trade one share.
Note: I am not receiving any payment or incentive to advertise Robinhood.
If you can’t find a low or no-cost broker, you can still reduce the trading fees as a % of your investment returns by increasing the dollars that you use in each trade.
For example a $10 trading fee on a $500 transaction is 2%, but a $10 trading fee on a $5,000 transaction is 0.2%.
The important part of this last protip is that fees are a larger issue the smaller your investment size.
The last thing you can easily do to reduce your fees is to trade less. This not only allows you to lower your trading fees, but if you typically hold onto your investments for a year or more, your tax rate on your profits drop from a federal income rate of ~30% to a long-term capital gains rate of 15-20%.
Stop trading profit for fees. Ditch the fees and increase your investment return, today.
How much do you pay in fees to trade?