Strategy basics: Costs

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There is only one way to loose money on stock market which has 100% success rate: costs. Many individuals who start their investment career, do not pay attention to cost efficiency. They are just looking for thrill and excitement of buying and selling stocks, bonds or ETFs. This blog is not for thrill seekers, it is about increasing your wealth slowly and steadily, and managing your costs is key factor on your success. I've collected a few basic rules:

1. Do not trade excessively

This is true especially if you are buying direct stocks or ETF funds which are publicly traded on stock exchange. This is also true with regular investment funds, which charge a commission when you purchase.

2. Choose cost efficient products

Usually, banks and investment companies try to sell you a fancy product with active management. In real life, this means lots of trading and aiming for "beat the market" -profits. Vast majority of investment funds try to outperform the market, and if they succeed, fund gets popular. If it doesn't work out, the fund ceases to exist or merges with some other fund, which has managed to outperform the market. Problem with this is that you never know beforehand if a fund will beat the market. You only know, that the cost ratio is more expensive with actively managed funds. Most index funds are low cost, and they give you approximate market performance minus their costs. This is also why costs are important.

3. Pay attention on purchase amounts

If you buy direct stocks, ETFs or other instruments which are traded publicly on stock exchange, calculate how much your broker takes as their commission. Your cost ratio per purchase should never exceed 1%

If you feel that you cannot achieve enough money to buy direct stocks or ETFs without exceeding 1% fee, try to find cheaper alternatives. Traditional funds usually accept smaller amounts per purchase.

4. Find cheap broker

Good broker for "boring investor" is a broker which offers good selection of funds and stock market possibilities. Best brokers offer free of commission purchases for individuals, who purchase stocks monthly. This means that you set up your investment strategy, deposit cash each month to their account and on certain date, they will purchase stocks, ETFs or funds by your strategy, with 0 commission. The catch is that usually people who save money on monthly basis, end up doing other business with them too. But taking advantage of zero commission purchases increases your chance to make money.

5. Bottom line

Every cost, commissions, taxes, monthly fees, reduce your income. Like I first mentioned, costs are only way you can loose money with 100% efficiency. If your investments make 10% yearly profit with 3% cost rate, you only make 7%. If you have cost ratio of 1% or less, you make 9%. Over time, this accumulates to a substantial amount of money. For example:


Invest 200€ for 40 years with 7% return, at the end you will have 401 103€
If your return is 9%, you will have 753 930 €

Does the 2% cost ratio difference look substantial or what?