Now That Commissions Are Free, Here’s How To Avoid The Big Costs Of Investing

TRADE FOR FREE! NO COMMISSIONS! Sounds too good to be true? Well, it is and it isn’t. Allow me to explain.

Within the past few weeks, a slew of brokerage firms reduced the rate their customers pay for online stock and ETF trades. In fact, they reduced them to dust. Interactive Brokers (IB) started it. Schwab joined in. Then, the cavalry arrived. Many of the largest firms followed suit in different forms. They joined IB, Schwab and the many robo-advisors who have offered free trading for a while.

What does it all mean for you?

Let’s start with the simplest part. Whether you trade your own accounts, or a professional advisor manages your assets, there is a very good chance your costs to execute trades has been reduced. It might even be zero.

However, that does not mean that investing is now “free.” It never was. Now, I know what you are thinking. You don’t use mutual funds, and you don’t use ETFs. So, your returns are not reduced by those “expense ratios” that are embedded in managed funds. If you buy and sell individual stocks, that is true.

You may also point out that you have most of your assets in tax-deferred accounts, such as an IRA or your 401(k) plan. Again, you are correct in assuming that you will not be taxed on those assets until you take them out or reach age 70 1/2. So far, investing sounds pretty darn inexpensive to me!

Today In: Money

The real costs of investing

One of the most frustrating things to me after more than 3 decades in the investment business is how quickly people jump at the chance to get something for “free” without considering the whole picture. Zero commissions on stock and ETF trades is just the latest example.

Trading, execution (how good a price you get when you place an order with a brokerage firm), and expense ratios get all the hype in the “race to the bottom” that is today’s big Wall Street.

Taxes…and how Wall Street tries to make them exciting

Taxes get some respect as a cost to reckon with. However, here too, the industry (especially the Robo firms) has created unnecessary drama by touting something call “tax loss harvesting (TLH).” This is something many of us in the field have done religiously for taxable client accounts for years. And we have done so with a focus on each client’s specific tax situation.

Now, firms will put your account on an automated system that hyper-actively swaps you from one security to another similar one, in order to generate a constant stream of tax losses. These can be posted against gains to reduce your tax bill. Great in theory.

TLH does not mean TLC

However, from the live examples I have seen, these TLH programs crowd out some very good investment strategy work. This would take an entirely separate article to explain. Perhaps I will post one.

For now, suffice it to say that in some instances, investment firms are charging an extra fee for something that is potentially overkill. That same service can be done more carefully and inexpensively as custom work for each client. It is just one of those things that you need to be aware of.

In an era of zero commissions, these for-profit firms are not going to find other ways to profit. In no way am I saying they don’t provide a helpful service. Just don’t get caught up in the hype.

Money market rates…also going to zero?

For example, the interest rate paid on money market funds at brokerage firms is, shall we say, in a bear market. That is, the rates are plunging. This is because brokerages are returning to one of their most profitable business, now that short-term interest rates have popped up from 0%.

For example, if T-bills yield 1.50%, you would hope that the money market fund that is used to sweep cash in and out of when you trade would pay somewhere in that range. Check carefully. Many firms have dropped those rates so that they are way, way lower than T-bills.

Cash management: the new tool in your toolbox?

That does not mean that it is a bad deal for you. If you trade actively, and don’t hold a high cash balance anyway, your interest in dollar terms is quite tiny to begin with. But if this is not the case, perhaps you are better off sharpening your skills as a “cash manager.”

I know I have done this in the accounts I manage over the past year. There are ETFs that invest in short-term, high-quality bonds like Treasuries. And, now that there is no commission cost to trade them through many firms, they may be worth considering as a money market surrogate.

The BIG cost of investing that gets too little attention

Drum roll, please…its lousy performance in down markets. Or, as David Letterman said, its all fun and games until someone loses an eye. So, amid all of the excitement about how little it will cost you to “play the market” with no trading costs and low expense ratios, there is still an issue. If the stock market drops 20%, 30%, 40% or more, you had better have a plan.

And, the plan can’t be to figure it out on the fly. Ask the folks who were suddenly faced with that in 2000 and 2007, the winds shifted. We all want to get our “fair share” of the ups. But when markets freak out and $20 of every $100 you had in your portfolio can potentially vanish in a few weeks (as stock index funds did around this time last year), lack of risk-management becomes the only cost that matters.

To try to put a bow on this cost discussion, consider the following if you have $500,000 to invest, and you are not a day trader, nor a straight buy-and-hold investor:

* The cost of 40 trades a year used to be about $5 each. That’s $200 a year you saved, with commissions going to zero.

* You switched to index funds from active funds, and maybe mixed in some stocks. Let’s say that shaved your portfolio expense ratio from 1.00% to 0.20%. You saved $4,000 on that $500,000 portfolio.

* Taxes: you generated capital gains of $30,000, but used TLH to knock that down to $10,000. Assuming a 30% tax rate, you saved $6,000 in taxes. This is getting better and better!

Minimal risk-management: the market fell by 20%, and you escaped with “only” a 18% loss. But that’s still a $90,000 decline in the portfolio! If you had practiced risk-management using some of the techniques I discussed in recent articles (tactical positioning, options, inverse ETFs, etc.), you might have kept that loss to half that.

Naturally, everyone’s situation and objectives are different. However, the key is to recognize the relative impact of the different types of investment “cost.” In the examples above, the cost of trading was well under 1%. The impact of expense ratio was a bit under 1%. TLH helped (assuming you had gains to offset with losses), to the tune of just over 1%.

However, risk-management can be “worth” well over 1%. That’s the point, and what you should focus on when evaluating your total “cost” of investing.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors

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Follow me on Twitter or LinkedIn. Check out my website or some of my other work here.

I am an investment strategist and portfolio manager for high net worth families with over 30 years of industry experience. A thought-leader, book author and founder of a boutique investment advisory firm in South Florida. My work for Forbes.com aims to break investment myths and bring common sense analysis to my audience. Connect with me on Linked In, follow me on Twitter @robisbitts. Visit our website at http://www.SungardenInvestment.com.  What do you think? I welcome your questions and feedback at rob@sungardeninvestment.com. For more on this and related topics, click here.

Source: Now That Commissions Are Free, Here’s How To Avoid The Big Costs Of Investing

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https://www.sbmoneytips.com/ Learn the first secret of successful investing with Part I of our three-part series! *** Did you know that the average individual investor does worse in the stock market than the market itself? In other words, if you just held a broad index fund and did nothing but hold on until you hit retirement you would do better than most. It turns out that the problem has nothing to do with a lack of market savvy or anything like that. Instead, it has everything to do with human emotions. Once you learn the enemy you can master it! So let’s take a quick look in the mirror and get acquainted with our opponent! The first secret is simply to invest as soon as you can. Don’t sit on the sidelines! Start now and let compounding do the heavy lifting over time. Make the effort to learn something new: like how to set up an account and put some money to work. Either do it on line or call one of the big brokerages. You’ll be richly repaid for your efforts! The next secret is to avoid being too conservative when investing for long-term goals. Many people are reluctant to invest in the stock market because they are afraid they’ll lose money. And they’re right – they will! But allow enough time and the results come back to the long term averages. Take a look at this chart showing the S&P500’s results from 2007 through 2015. That drop in 2008-2009 was pretty terrifying – I know! I personally lost over a third of my money in it! And it was really uncomfortable. But look what happened after that. It took several years but the market came back and is now well above where it was before the great recession. The right thing to do is to stay the course. Invest when you have money to do so and only sell when you need the money. This is really important. Hang on when you’re in the middle of one of these lurches and don’t sell or change your game plan.

Three Credit Score Myths That Are Wildly Untrue

Sydney Enzler opened her first credit card when she was a 19-year-old college student. Her mom encouraged her to open the account in order to build credit and establish a strong credit score.

“I wanted to use my credit cards every once in a while to build credit, but I generally just use them for larger purchases,” said Enzler.

Now 24 years old, Enzler is one of the millions of Americans who owe a collective $1.1 trillion dollars in credit card and other revolving debt. According to the Federal Reserve, the average interest rate on those credit card balances is 16.97% APR.

With interest rates that high, it’s easy to see how credit card debt can quickly spiral out of control and leave you with a bruised wallet – and ego. The reality is that credit cards aren’t going anywhere, and they play a large role in determining your credit score – a critical factor when it comes to getting the lowest possible interest rate on your mortgage or other loans.

Today, I am dispelling three common credit card myths so that you can focus on the things that will actually improve your credit score.

Myth 1: Carrying A Small Credit Card Balance Is Good For Your Credit

Today In: Money

I applied for my first credit card shortly after my 18th birthday and I remember being told by a well-meaning colleague at work that I should try to use the card regularly and carry a small balance. The rationale was that by using the card and paying a small amount of interest monthly, the bank would love having me as a customer and give me a better credit score.

Fortunately, I was a curious teenager and fact-checked that claim, because it’s not true. And not following that advice has saved me hundreds, if not thousands of dollars in unnecessary interest charges over the years.

To begin, your credit score is not determined by your credit card company or any other lender. Your credit card issuer (in my case it was Chase), provides the credit bureaus with regular updates on your payment and account history. These credit bureaus (Equifax, Experian and TransUnion) simply receive information from your lenders and use it to calculate your credit score.

Second, carrying a balance on a credit card will increase your utilization, which could actually lower your score. In general, using less of your available credit is better from a credit score perspective.

The important lesson here is that it’s never wise to pay interest on your credit card if you can avoid it. Always pay off your full statement balance in full if possible. It will help you lower your credit utilization while avoiding costly interest charges.

(Read: The 60 Second Guide To Credit Utilization.)

Myth 2: Checking Your Credit Report Will Hurt Your Score

Reviewing your credit score regularly (and for free) is one of the best things you can do as a responsible credit card user. Period.

However, the myth that checking your credit hurts your score pervades, in part, because of the confusing language that’s used to notate when your credit file has been accessed. Whenever your credit report is requested, you’ll receive an ‘inquiry’. However, it’s important to note that there’s a big distinction between ‘soft’ and ‘hard’ inquiries.

When you request your own credit report, this qualifies as a soft inquiry. Soft inquiries have no effect on your credit score whatsoever. That means that checking your own credit report will not hurt your credit score. It’s that simple.

However, when you apply for a new loan or other type of credit, the prospective creditor will access your credit file to assess your creditworthiness. This will result in a hard inquiry, which will, in fact, have a negative impact on your credit score. Hard inquiries will remain on your credit file for two years, although they will only affect your score for 12 months.

If you’d like to check your credit report, you can do it here for free. By law, each of the three major credit bureaus must give you free access to your credit report once per year. I try to check a credit report from a different bureau every three to four months to check for inaccuracies or fraud. In fact, I just requested my credit report while writing this article and it took all of 90 seconds. You should do the same.

Bonus: If you are serious about protecting your credit you should also freeze your credit files for free.

Myth 3: You Can Pay Someone To Fix Your Credit Score

If you have a history of making late payments and don’t practice sound credit management, there’s no magic switch you can flip in order to have accurate information removed from your credit report on-demand.

While there are a lot of credit repair services roaming the web and social media, the fact is that they don’t do anything that you can’t do on your own.

The best way to repair your credit is to practice good credit management strategies. This means paying your cards and other credit accounts on time, every time. It also means understanding how credit scores work and what the components that go into your score are.

The components of your credit score are as follows:

  • Your payment history comprises 35% of your credit score
  • Amount of debt (credit utilization) comprises 30%
  • Length of credit history comprises 15%
  • Amount of new credit (and inquiries) comprises 10%
  • Your credit mix comprises the final 10% of your credit score

This means that 50% of your score (payment history and length of credit history) is related to time. Clearly, to meaningfully improve your score it will take patience.

If you’re getting ready to apply for a mortgage, or if you are hoping to lower your student loan interest rates by refinancing, here’s what you can do to give your score a boost more quickly. Thirty percent of your score is based on your credit utilization, which is essentially based on a current snapshot of your accounts. While it could take years for negative marks to roll off of your credit report, you can quickly lower your credit utilization.

Your credit utilization is determined by taking your outstanding balance on your revolving credit accounts and dividing it by the total credit available to you. It could take several weeks for the updated information to be passed from your creditor to the credit bureaus, but it’s a fast way to improve an important metric. For the highest credit scores, aim to lower your utilization below 10%.

Don’t lose sight of the fact that it can take time to improve your credit score. Start to establish healthy credit habits today so that your score reflects them in the future. But most importantly, don’t despair if your credit isn’t perfect.

Regardless of what your credit score is, it’s important to know that your credit score might not be as important as you think it is.

Follow me on Twitter or LinkedIn. Check out my website or some of my other work here.

Camilo Maldonado is Co-Founder of The Finance Twins, a personal finance site showing you how to budgetinvestbanksave & refinance your student loans. He also runs Contacts Compare.

Source: Three Credit Score Myths That Are Wildly Untrue

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Get exclusive content: http://patreon.com/mattdavella There’s a basic formula to win at personal finance. And it’s this… Make more money than you spend. In practice it’s not that easy. In the real world our money slips through our fingers. No matter how much we make our bank account seems to have its own agenda. In this video I breakdown common myths, pressures & misconceptions about money and how to manage it. New videos every week! New podcast every Wednesday! My gear… https://kit.com/mattdavella ^These are affiliate links. I only recommended products that I use & fully endorse. Subscribe: https://goo.gl/nzS5ri Podcast: http://groundupshow.com Instagram: http://instagram.com/mattdavella/ Twitter: http://twitter.com/mattdavella/ Thanks for watching!

Progress Ahead? Hopes For China Trade Progress Rise, Putting Markets On Solid Footing

A long weekend looms, but before that, there’s a lot to digest. Perhaps topping the list is the latest scuttlebutt around trade with China (see more below). Netflix earnings also rank high, with shares down 3% in pre-market trading after a Q4 revenue miss. Automaker Tesla is also in the news after announcing plans to shrink its workforce as it tries to lower product prices and improve its margins………

Source: Progress Ahead? Hopes For China Trade Progress Rise, Putting Markets On Solid Footing

Everything I’ve Learned About Personal Finance in 10 Sentences

We’ve featured a lot of tips from The Simple Dollar’s Trent Hamm—from buying in bulkand earning money online to managing a career hiatusand overcoming decision fatigue. Here, he shares his ten most important pieces of financial advice……..

Source: Everything I’ve Learned About Personal Finance in 10 Sentences

How Islamic Finance Could Save the Planet

With mystic peaks, coral reefs, jungles and over 4,000 hours of annual sunlight, Malaysia’s Sabah state is an ideal candidate for clean energy initiatives. But what makes its 50-megawatt solar project, launched in April 2018, special isn’t just its potential to provide electricity to this northern Borneo region. The project is the outcome of funds raised from the world’s first Islamic green bond, with a value of $60 million, unveiled by Malaysia’s Securities Commission in July 2017………..

Source: How Islamic Finance Could Save the Planet

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