Submitted by William Briat as part of our contributors program.
Investment Expenses: Three Ways to Cut Them
Long-term investing and growing a portfolioover time isn’t an easy task. It requires a lot of planning and a significant amount of research. While doing this, many investors tend to forget one very important aspect: the costs associated with investing in their portfolio—the commissions and fees. If investors control the commissions and fees paid to their brokers and elsewhere, they can save a significant amount of money and have a bigger portfolio in the end.
For those investors who have resolved to invest money in their portfolio in 2014, the following are three ways to add more wealth to your portfolio over the long term.
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Use Discount Brokers vs. Conventional Brokers
If an investor opens an account with a discount broker—often referred to as online brokers—they can save a significant amount of money in trading fees compared to a conventional broker, who they have to call to place a trade. Discount broker commissions are much lower than those charged by conventional brokers: a discount broker’s fees can go as low at $5.00 per trade, while a conventional broker’s fees can be 10-times that amount or more.
Consider, for example, that you have an account with a conventional broker who charges a commission of $50.00 per trade, and you make about 30 trades on an annual basis. At that rate, your commission charges will amount to $1,500 per year. With discount brokers, these commissions can be as low as $150.00 a year. With the extra $1,350 you saved by switching to a discount broker, you can invest more capital in your portfolio.
Buy Exchange-Traded Funds (ETFs) vs. Mutual Funds
Holding ETFs in your portfolio can yield greater benefits than holding mutual funds, because ETFs tend to have lower fees and expenses compared to their counterparts. For example, ETFs like SPDR S&P 500 (NYSEArca/SPY), which tracks the performance of the S&P 500, has a net expense ratio of 0.0945%. (Source: “SPDR S&P 500 ETF,” State Street Global Advisors web site, last accessed February 11, 2014.)
On the other hand, a mutual fund like Fairholme (FAIRX), which is focused on long-term growth, has a net expense ratio of 1.01%. (Source: Yahoo! Finance, last accessed February 11, 2014.)
Enroll in a Dividend Reinvestment Plan (DRIP) vs. Buying Stocks
If you have chosen to buy dividend paying stocks as part of your portfolio and have made the decision to reinvest the dividends in the stocks again, you will be better off by enrolling in the company’s DRIP. By using this plan to add to your portfolio, you’re essentially buying commission-free stocks. This can save you money over time, and the majority of big-cap companies that pay dividends, like General Electric Company (NYSE/GE) and International Business Machines Corporation (NYSE/IBM), have DRIP programs for their investors.
Consider this: if you aren’t enrolled in a DRIP, and the company pays dividends four times a year, this will mean that you will make four purchases throughout the year to reinvestment your dividends. If you have a discount broker, you might pay $5.00 to $20.00 per trade in commission fees; if you have a conventional broker, you’ll be looking at paying closer to $200.00 in fees. These costs add up in the long run. Clearly, a commission-free DRIP program is the way to go to save capital and boost your portfolio.