Investing can be a minefield in terms of costs, both in terms of the money you might lose and the fees you’ll have to pay just to participate.
Since every dollar you pay in fees comes at the expense of your investable capital, it’s important to minimize these costs, which can really add up over the long run. Imagine, for example, that you pay $500 per year in various fees in your investment account. If you save for 40 years, say from ages 25 to 65, you’ll pay $20,000 in fees. Even worse, if you instead invested that $500 in fees every year and earned a 10% return on it, instead of paying $20,000 in fees you’d have an additional $263,000 in your nest egg.
For this reason, it’s a good idea to consider the things frugal people always do with their investments — so you can make appropriate changes in your own portfolio.
Commissions used to be a fact of life for all investors, but times have changed in recent decades. Now, a host of online brokers charge $0 commissions for most stocks and ETFs, and many mutual funds are available for no commission as well.
Even some of the larger financial institutions like Chase and Bank of America offer zero-commission trading through their online outlets, so it really doesn’t take much effort to avoid commissions.
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Use Passive Investments
Mutual funds and ETFs can be managed either actively or passively. An active manager will pick and choose stocks or other investments on behalf of investors, buying and selling as they wish in an effort to generate the best return.
Passively managed funds generally track existing indexes, such as the S&P 500, and trade infrequently. If you’re looking to keep costs low, passive investing is usually the way to go, as transaction costs — not to mention management fees — are typically higher for actively managed funds.
Find the Lowest Cost Variations
Investing is such a competitive business that you’ll usually have a few different choices of the same type of investment. For example, if you’re looking to buy an S&P 500 index fund, you have an abundance of choices. The SPDR S&P 500 ETF Trust (SPY), for example, is the oldest, largest, and most liquid ETF in the world, but it’s not the cheapest S&P 500 ETF you can buy.
While the SPY is extremely inexpensive, with a gross expense ratio of just 0.0945%, one of its competitors, the SPDR Portfolio S&P 500 ETF (SPLG), sports an expense ratio of just 0.02%. For an essentially identical portfolio, this could make SPLG the favorite among frugal investors.
Even though you may be able to trade stocks and ETFs for no commission, you can still save money by trading infrequently. Small transaction costs are attached to every trade — even those that charge no commission — and the more you trade, the more you’ll pay.
Frequent trading may also trigger a large tax bill. As you don’t have to pay taxes on your capital gains until you actually sell an investment, holding onto your investment for longer can shield you from taxes. It can also help turn your capital gains from short-term into long-term, which offers another way to save.
While short-term capital gains are taxed at your ordinary income tax rate, long-term gains benefit from a lower 15% rate. In fact, if your taxable income is below $44,625 (or $89,250 for joint filers), you may even qualify for a 0% long-term capital gains rate.
Check Regularly, but Infrequently
While you should always monitor your portfolio, if you’re looking to keep costs low, checking regularly — but infrequently — can help. The more you look at your portfolio, the more likely you are to tinker with it, perhaps trimming or adding to positions, buying on impulse or even second-guessing your entire investment plan.
The best course of action if you’re a frugal investor is to work diligently to build a long-term portfolio that meets your investment objectives and risk tolerance and then let it do its thing.
Frugal Investing Caveats
It makes sense to reduce your investment fees as much as possible, but this doesn’t always mean that the zero-cost option is the best choice for you. For example, if you know absolutely nothing about investing in the stock market and treat buying and selling stocks like a video game, you’ll likely be doing more harm than good by using a commission-free broker. In that case, paying a fee or commission might actually help prevent you from overtrading.
If you’re unfamiliar with how to build long-term wealth, paying a licensed financial advisor may actually be the better choice than trying to do it yourself for free. The few hundred or thousand dollars you might pay could actually result in a bigger nest egg for you by the time you’re ready to retire.
Lastly, choosing the absolute lowest-cost index fund, mutual fund or broker doesn’t always translate to the best long-term value. Some funds might charge next-to-nothing in annual expenses, but also have terrible performance. Similarly, the cheapest online broker might not provide things like research, charting, customer service or a sufficient variety of investment products.
When shopping for anything, including investments, you should never confuse “frugal” with “cheap.”
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This article originally appeared on GOBankingRates.com: 5 Things Frugal People Always Do With Their Investments
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