There’s no such thing as a free lunch. This holds true with investing as it does with so many other things in life. When you invest, there are management fees and costs that accompany buying & holding investments that affect your bottom line. These fees can add up quickly, and these costs are the price of doing business. Being aware of the impact they have on your returns can help you make better investment choices. Here are some investment fees and costs to look out for.
- Brokerage Fees. Depending on your broker, you may find yourself on the hook for a laundry list of small fees, ranging from those for paper statements to annual fees and even inactivity fees. All can add up over time. You may be able to opt out of some of these, such as a monthly fee to receive paper statements, which might be avoided by selecting a no-cost paper-free option. However, if you don’t plan to trade often, and you’ll incur hundreds of dollars in fees for inactivity, you may want to research another brokerage firm.
- If you trade frequently, your activity may become an expensive habit, because of the dollars you lose to commission fees. You can help reduce these costs by using commission-free exchange traded funds or no-load mutual funds. You also might want to consider limiting your trading to occasional rebalancing.
- Management Fees. Nearly all mutual funds charge annual fees, but how much you’ll pay can vary. The costs often depend on whether the fund is actively or passively managed. Actively managed funds usually have higher fees, given that they’re run by experienced professionals who are pursuing a specific investment strategy that may require specialized knowledge. Passively managed funds, on the other hand, use computer algorithms and models to attempt to replicate the performance of a particular index, such as the S&P 500. Their fees are typically lower as a result.
What you’ll pay for these services should be disclosed in the fund’s prospectus. Look for the fund’s expense ratio, and pay close attention to how much of your returns will go toward fees when selecting which fund is right for you.
- Capital Gains Taxes. Another side effect of buying and selling too often is that you may end up owing a sizable amount in capital gains taxes. Short-term capital gains refer to profits on investments held for less than a year, which are taxed at normal income tax rates. Long-term capital gains are taxed at a much lower rate. Maintaining a buy-and-hold strategy with your investments can help you avoid paying more in taxes.
Some investment costs are unavoidable, and others may be worth it. Just be aware that over time you need to be keeping an eye on investment costs. Working to help reduce them when it makes sense can make a big difference in your returns.
