Ask the Advisor: Ways to Reduce Investment Costs

Question: What are the best ways to keep investment trading costs low?

This is a smart question because the primary purpose of investing is to achieve good returns and one of the most basic ways to boost returns is to keep trading costs low.

As with any other area of financial savings, many people are good at shopping for deals on the big ticket items but they often overlook the occurrence and frequency of the small purchases. For example, a consumer might save hundreds of dollars on the purchase of a home appliance, such as a refrigerator, but squander away the savings on buying sodas, lattes and snacks.

Keep Trading Frequency Low

Investment trades at a discount broker, such as Charles Schwab or Scottrade, might cost you around $7.00 per trade. If you are buying and selling shares of several investments on a monthly basis, which you might not think is too often, your trading costs can reach several hundred dollars per year. Be sure to keep trading frequency at no more than one trade per month, if possible. This will not only help focus your attention on making one really smart investment per month but it will also save you hundreds in trading costs.

Monitor Time Spent on Research

Have you ever driven miles out of your way to save 2 cents per gallon on gas? It takes energy to search but it also takes time. If you spend 5 hours per week researching investment ideas that might increase your overall returns by 2% per year, does the financial reward justify the time spent? What other activities might be more productive? What opportunities, both financial and non-financial, might you be missing?

Consider Low-Cost Mutual Funds

Every discount broker offers mutual funds that have no trading fees. These funds are usually called "no transaction fee" or NTF funds. Note: Don't confuse transaction fees with loads, which are separate charges from the mutual fund company. Look for "no-load" funds that are NTF. Furthermore, you should look for funds that have an Expense Ratio below 1.00%. Also, mutual funds remove much of the research time required with trading individual securities.

For some ideas on buying high quality, low cost mutual funds read my post about investing with one mutual fund.

Kent Thune is a Certified Financial Planner™ and owner of an independent, "fee-only" investment management firm in Mount Pleasant, SC. Kent is also a freelance writer. To read more of his work or to find out how to contact Kent, please visit his blog at The Financial Philosopher. Have a question? Email AsktheAdvisor@savings.com.

_{Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment} ^{advice. Under no circumstances does this information represent a recommendation to buy or sell securities.}