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Unnecessary fees crush investor’s returns. And in this article we’re going to show you how you can easily avoid them.
I won’t bore you with the math here. But just know that even fees that seem small cuz they’re small numbers – like 1% here or $10 there – add up over time.
In fact, they could easily cost you $1000s or, likely, WAY more over your investing lifetime.
So a key part of successful investing is to keep your fees as low as possible.
We’re assuming your goal here is to build your OWN nest egg. Not let some Wall Street muckity-muck or slick talking advisor put your hard earned dough toward their latest boat payment.
So, with that in mind, here are 4 ways to cut down on investment related expenses.
It used to be super expensive to trade stocks. Every time you bought and sold, your broker would hit you up with fees. Maybe $10. Maybe $100 or more.
Either way, these fees cut into your returns.
These days, stock trading fees are completely avoidable. Stock trading apps like Robinhood allow investors to trade for free. (Though Robinhood has a number of drawbacks which you can read about here.)
Cuz of Robinhood’s success, however, a lot of other stock trading sites now offer free trades. Check out a list of our 4 favorites here.
Stick with these options when trading to keep more of your money. There’s just no reason to pay fees to trade stocks anymore.
Over the long term, most actively managed mutual funds underperform the market.
Plus they charge you all sorts of fees for that underperformance – high expense ratios, loads, 12b-1 fees, etc. The nerve of these d-bags!
Index funds, however, are a kind of mutual fund that are known for their low costs. And they’re pretty much guaranteed to match the returns of the index they’re tied to. Which means they’ll outperform most of the actively managed mutual funds (again, over the long term).
High mutual fund fees are something to especially look out for when it comes to choosing investment options in your company’s 401(k) plan. They’re notorious for offering high fee options that eat away at your returns.
So if you’ve got a 401(k), do your research and try to pick index funds for your 401(k) if at all possible.
Every time you sell a stock or mutual fund for a profit, you pay taxes on your gain. But there’s at least one situation where that ain’t the case.
It’s when you do your trading in a Roth IRA.
Roth IRAs are a kind of retirement account that are funded with money that you’ve already paid taxes on.
The cool thing about them though is that when you take your money OUT of a Roth IRA, you pay no taxes on it. That includes any dividends you get from your investments as well as any gains in your stocks/mutual funds you’ve made over the years.
Let’s say you dumped $10,000 in an index fund inside a Roth IRA and forgot about it. 20 years from now you peak at it and see that $10,000 is now worth $32,071.35. (This is assuming you didn’t add any money over the years and a very conservative 6% return.)
If that money was NOT in a Roth IRA, you’d owe taxes on the $22,017.35 when you sell your shares.
But if it’s in a Roth, you’d owe nothing. Nada. Zilch. That money is all yours! That’d be an extra few thousand smackers you could put toward travel, health care expenses or spoiling your grand kiddos.
Now you do have to wait until you’re 59 ½ to take money out of a Roth tax free. So this isn’t gonna work with money you think you’ll need before then.
But, for long term savings, you can save a crap ton on your taxes if you rack up those gains in a Roth IRA.
First, good financial advisors can definitely provide value. So if you don’t know a thing about investing, don’t care about it, don’t have the time for it… then the fees paid to a broker could very well be worth it.
That said, brokers/advisors usually often charge a percentage of how much money they manage for you. And those fees can add up big time over the years.
Also, depending on the advisor, they may recommend insurance policies and other types of investments that may not be in your best interest. Sure, they make ‘em sound amazing (like any good salesman would) but the fees in these things may make them a lot more money than they make you.
On the other hand, if you take some time to educate yourself about even the basics of investing and invest in low cost mutual funds (a low cost, not very time intensive way to go about investing), you can avoid all the management, trade, brokerage, advisory, etc. fees that brokers/advisors charge.
And, if you feel you need someone to go to for some retirement planning or just want an expert’s set of eyes on your investing accounts to make sure you’re not screwing things up, give a fee-only investment advisor a call.
You can find them at https://www.napfa.org. They are investment professionals who just charge a flat fee or hourly rate. No commissions, advisory fees or the like.
As with golf scores, blood pressure and the Limbo… when it comes to investing fees, lower is better.
Keeping your investing fees/expenses low leads to higher amounts of money in your pocket (which is where it damn well should be!).