Eliminating trading costs add up

Cut stock trading costs

Schwab, TD Ameritrade, and Fidelity recently announced they were dropping brokerage fees when buying or selling stocks through them.  As you can imagine, eliminating transaction costs may result in a significant bonus for investors.  The size of the bonus depends on the cost of the trade, the frequency with which trades are made, and the investing time horizon in question.

I use Fidelity which traditionally charged me $4.95 per transaction.  This figure is low relative to what I’ve been charged by brokerages in the past.  By dropping the trading fee, I get to put that money to work for me instead of Fidelity.  Would this savings result in a large improvement in my investing performance?  Possibly.

If my acquisitions are made periodically e.g., monthly, then saving $4.95 per month and putting it to work in my portfolio results in applying another $59.40 to my investments each year.  Do that over enough years and the delta adds up. 

The figures below demonstrate the result if you start with $1,000 in your portfolio, purchase $100 worth of stock per month for 5 years, and enjoy no yield, interest, or growth other than the money you add monthly.  The first figure (Excel Future Value computation) assumes zero transaction costs.  The second includes $4.95 per trade reducing my investment by a similar amount.

• No Fees:  $7,000
• Fees ($4.95 per trade):  $6,703

No Fee Advantage:  $297

In this simplified example, including only the invested amounts per month of $100 vs $95.05, the elimination of even a small transaction fee adds nearly $300 to my portfolio over 5 years.

What happens if I assume my investment yields 4% annually while I invest $100 each month for 5 years?

• No Fees:  $10,065.33
• Fees ($4.95 per trade):  $9,657.03

No Fee Advantage:  $408.31

Enjoying an additional $408.31 over 5 years because there are no trading fees may not be exciting, but what happens if my investing time horizon extends to 30 years instead of 5 while enjoying a 4% yield?

• No Fees:  $388,941.02
• Fees ($4.95 per):  $371,467.95

No Fee Advantage:  $17,437.07

Having nearly $17,500 more in my account when I retire because I saved $4.95 per trade over my investing life is a nice bonus.

Of course, if you’re trades are costing you north of $5 the savings might yield an even larger advantage for you between now and retirement.  Higher fees also mean your trading volume can be lower e.g., quarterly or semi-annually and you’ll still see a marked difference in outcomes.

 

Something as small as 1% can make a difference.  Take advantage of the breaks available and you’ll be amazed at how quickly the benefits accumulate.  As a Dividend Farmer I enjoy watching the “littles” compound into “bigs”.  It takes patience and perseverance but the wait is worth it.

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.