Keeping Investment Costs Down Pays

It’s an indisputable fact in investing: If you can keep down your costs, you’ll have more in your pocket in the long run. Lower costs generally mean better returns.

There are lots of ways investors pay for the “privilege” of buying and holding investments. And although there is no way to eliminate all investing costs, investors can pay less if they pay attention.

Here are some of the costs of investing you can control:

Brokerage commissions – Long ago, if you wanted to buy or sell a stock, you had to pay a fairly large fee. Deregulation of the brokerage industry in 1975, and the advent of online trading in 1996, pushed brokerage commissions so low that they’re almost negligible. Before deregulation, it might have cost an investor hundreds of dollars to buy 500 shares of stock. Today, placing an online trade can cost less than $10, regardless of the number of shares.

“Loads” – Mutual fund shares sold by brokers carry commissions, called “loads,” sometimes as high as 5% of the purchase amount. No-load funds are purchased commission-free, at net asset value.

Spreads – Stock prices are quoted as bid (the price at which you can sell your shares) and ask (the price at which you can buy shares). The difference between these prices is called the spread. For securities (including ETFs) with high trading volume, the “spread” can be as little as a penny a share. Securities that don’t trade a lot will have larger spreads. When you buy or sell a stock, you incur a cost that is equal to the spread, in addition to the commission.

Carrying costs – When you hold a mutual fund or variable annuity subaccount, you continuously pay internal expenses that you don’t see. They are paid from the net assets of the investment and directly reduce their performance. These include:

  • Marketing expenses. Referred to as 12B-1 fees, these are assessed by mutual funds and are part of a broker’s compensation. They can be as high as 1% per year.
  • Management fees – Ongoing payments for managing the fund, these can be as high as 3% or as low as 0.03% per year.
  • Insurance expense – An additional fee paid by holders of variable annuity subaccounts. Can be as high as 2.9% per year.
  • Advisory fees – Many investors elect to retain the services of an advisor. Advisors can be paid in a number of ways, including commissions and fees. Fee Only advisors charge based on the size of the investment portfolio, a flat fee or an hourly fee. Fee Only means the advisor never accepts commissions for selling an investment or insurance product. In this way conflicts of interest are held to a minimum, and the advisor’s interests are aligned with the investor’s interests.

It is the practice of Mentor Capital Management Inc. to keep client costs of investing low. We do this through the use of discount brokerage accounts, low-cost exchange traded funds, no-load mutual funds and, where necessary, variable annuities with low or no insurance expenses.