Even the best financial planners and investors can’t predict what the stock market will do, much less control it. But there is something just as important that you can control: Your investment costs.
It may not seem like a lot, but even a 1 percent increase in your return on an investment can turn into tens of thousands of dollars if given enough time. One way to visualize this is to look at this compound interest graphic, which explains how much you can accumulate using compound interest over time.
Since we can’t control how much our investments earn, we need to take a look at our investment costs to see how we can preserve as much of our capital as possible and have that money working for us. There are several types of costs associated with investing. It can be a commission on a stock trade or an expense ratio on an index fund or mutual fund. Another type of investment expense is the money you pay a financial adviser, which can be fee based, portfolio based, or a commission on sales. Here is how you can control these investment costs.
Determine how much you are currently paying. Take a few minutes to review your investment portfolio, paying special attention to the expense ratio of each investment or fund. You should also note the frequency with which you make trades in individual stocks and ETFs. You may be paying a fee or commission each time you make a trade. It’s useful to track this information in a spreadsheet so you can make comparisons later.
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Research similar, but less expensive investment options. If you invest in mutual or index funds, you may be able to find a similar, but less expensive investment with another company. For example, let’s say you have a large cap fund with an expense ratio of 1.2 percent. Research similar funds at other brokerage houses and see what you can find. You may be able to find something with a much lower expense ratio, making more of your money work for your investment portfolio instead of for your brokerage firm.
Trade for less. You may also be able to find a financial institution that charges less for individual stock trades. Compare the price for each transaction to the commissions at discount brokerage firms and see how much money you can save. It may not be worth moving your portfolio if you rarely make trades. But if you are a frequent trader, then you can use more of your money for investing instead of paying commissions.
Examine the cost of your financial adviser. You might pay your financial adviser at an hourly rate, on commission, or based on a percentage of your portfolio. There are pros and cons to each of these methods, and you should ensure that the method you have makes the most sense for your situation. Before hiring a financial planner, find out how he or she gets paid. This can go a long way in helping you understand and control your investment costs.
Reducing your investment costs is the easiest way to get a bigger return on your investments. The savings will compound over time, hopefully helping you reach your investment and retirement goals sooner.