The cost of investing

By | October 30, 2016

the-cost-of-investing-dividends-down-under-blogAuthor: Mr and Mrs DDU.

There are so many different things to think about when we’re investing: How risky and volatile is the investment? What is its dividend yield? Will it keep growing its profits for many years to come? And many other questions.

One of the most underestimated parts of investing is the costs associated with buying and holding an individual share or fund. Costs can make a huge difference to our return on investment. If we’re paying a 1% charge of our portfolio to a fund manager each year, that’s a significant amount of compounding that we’re not earning each year – so they better outperform the market!

We individually own each of the shares that we’ve purchased, so there’s an upfront brokerage cost but then we don’t pay any ongoing fees after that. Re-investing our dividends with companies that offer that service also gives us more bang for our buck.

The problem for Australians is that there aren’t many brokers. Compared to some North American providers, Australian brokers are some of the most expensive out there. But is that really a surprise? Aussies seem to enjoy the big 4 bank’s higher loan interest rates, lower savings interest rates and expensive Superannuation funds –  have you ‘compared the pair‘ yet? (we’ve all seen those ads, you must have seen them by now).

If we were to buy a $2,000 parcel of shares right now, these would be the brokerage costs with the big 4 banks:

Commsec: $20 (1% of investment)

ANZ: $20 (1% of investment )

Westpac: $20 (1% of investment )

NABtrade: $15 (0.75% of investment )

Those prices are better than they were a few decades ago, technology has helped bring down the prices a lot, but they’re still expensive compared to other countries.

We’re always on the look out to reduce our costs wherever we can with our car, private health insurance or utility bills. The same frugal thinking can be applied to brokers as well.

We’ve been seriously considering moving to one of the discount brokers in Australia such as IG or CMC. Their prices are quite a bit cheaper than the big 4 bank price we’re paying right now. If we can save on brokerage costs, that gives us more to invest or save. We’ve spent over $200 on brokerage fees so far, imagine how much we’ll have spent in 10 years time. So any way we can reduce the cost is a good thing.

Final thoughts

For every dollar we save in brokerage is another dollar we can put towards our actual investing (and not to furnish the bank’s profits more).

I really hope the banks will reduce their fees in response to discount brokers like IG and CMC, but we highly doubt it.

Readers, have you done anything recently to reduce the costs of investing?

 

Thanks for reading this article about our investing journey Down Under.

Onwards and upwards!

38 thoughts on “The cost of investing

  1. wealth from thirty

    This is an important topic. People sometimes talk about a “x%” gain but if they happen to pay 4% in brokerage each way then it’s really eating into their return! Another thing I keep track of is how much I spend on investment books, web services and other subscriptions – all of this can be useful but should really be factored into the “cost” of managing an investment (some are tax deductable too, which helps) and be factored in to the total portfolio return

    As for brokers, I use CMC and they’re fine (stockbroking only, I don’t, and won’t trade CFD’s). No great reporting and very basic research, but if you have an account with one of the big 4 you’ll get decent research there (Morningstar a better option, which I use through my Uni for free). For international trades I use NABtrade – $14.95 is fairly competitive.

    Another useful trick is to cycle through the big four etc. but only sign up when they offer free brokerage (e.g. Commsec offered $600 free brokerage for a limited period when signing up for the first time). I did this with Westpac, Commsec and Belldirect and didn’t pay brokerage for my first year of investing. This was useful as my purchase parcels were only $500 each. Now I just stick with CMC and NAB and limit my minimum buy/sell to $2000 or more.

    Neat article – hope you’ve enjoyed the weekend!

    Reply
    1. Dividends Down Under Post author

      Thanks for the really comprehensive comment WFT 🙂 It’s true, there are many expenses that we don’t think about. It’s also important to remember that some expenses are once offs, but others are ongoing.

      I think there’s definitely a trick to get the best of both worlds – invest through the cheapest ones but get the research through one of the main brokers.

      We are really looking forward to saving ourselves some money, I can’t believe it has taken us this long to do it.

      We have had a nice weekend thank you, I hope you have too! Feel free to drop us a DM if you ever fancy a chat.

      Mr DDU

      Reply
  2. The Jolly Ledger

    This was my rookie mistake when I started investing outside of my employer plan a few years ago. I thought you had to pick individual stocks each one coming with a transaction fee. I hated paying that $7 each time. I am glad we have index fund investing here in the US. Takes the guessing out of the game and it is very low cost. We don’t get large dividend yields but we do get a solid 2%!

    Reply
    1. Dividends Down Under Post author

      Well, if you did want to go with individual stock picking, you would have been doing it right. But I’m glad you’ve found the way that works for you 🙂

      However we invest, it’s best to get the result for as cheap as possible, which is what we’re looking for.

      Mr DDU

      Reply
  3. Mustard Seed Money

    Here in the US I’ve played around with the Robinhood app. It allows me to trade for free. It’s wonderful and really easy to use. So that’s the best way that I’ve been able to reduce the cost of investing so far 🙂

    Reply
  4. Amanda @ centsiblyrich

    Investing fees can add up and really affect the bottom line, especially when you figure how the fees would compound out over time if they were invested. We took a hard look at our investing fees about 3 years ago and moved our investments around to take advantage of lower cost index funds. It’s too bad you don’t have more options is Australia! But at least you are weighing your options rather than just accept the status quo!

    Reply
    1. Vicki@MakeSmarterDecisions

      We did the same thing Amanda – but for many years we paid WAY more than we should have to high cost fund managers. I can’t even think about how much money we lost. This was just something we trusted our employer’s on – giving us good investments to choose from. Our fault for sure! I hope you have more options soon DDU!

      Reply
      1. Dividends Down Under Post author

        I’m glad you guys took it into your own hands and are getting your money to work the hardest for you now – instead of padding the pockets of fund managers pockets!

        Mrs DDU

        Reply
    2. Dividends Down Under Post author

      I’m glad to hear you guys took a look at your investing fees and got the best lower cost option – might be worth re accessing if your current choices are still the best value? Things can change so quickly especially with the competition of getting new customers.

      Mrs DDU

      Reply
  5. Amber tree

    Next to costs, I also look at convenience of the solution. My current broker is not the cheapest, yet has in my opinion the best solution for me.
    I look at another boker for my options (I do a lot each month). I have found one that is cheaper, yet, it is less convenient and limits some of my trades…

    There are real discount brokers in Belgium as well. Quite cheap on a per deal basis, yet, I read some weird fees they have. I have not decided to make the move.

    What is holding you back to switch broker?

    Reply
    1. Dividends Down Under Post author

      You’re right, looking at the convenience vs cost is very important. We think we’ve decided to go with the 2nd cheapest broker – the best of both worlds between convenience and cost 🙂

      Mrs DDU

      Reply
  6. TJ

    What’s nice about America is if you go the mutual fund route, you can almost always buy the fund for free if you go direct with the fund company. So for example, It doesn’t cost anything to buy a Vanguard fund at Vanguard. There are also several brokerages that will give you free stock trades for a limited time or forever if you keep a high asset base.

    But even for someone who doesn’t have much assets, TradeKing only charges $4.95 for a stock/ETF trade or $9.95 for a mutual fund trade which is pretty good, especially for the mutual fund route, considering Fidelity or Schwab is going to charge $50 or $75 for a mutual fund trade.

    A lot of competition keeps costs down, but like anything else, I’m sure sometimes people will pay more for convenience,

    Reply
    1. Full Time Finance

      Its funny as I had to lookup what you were talking about as I haven’t paid more then 10 dollars for a trade with either Schwab for Fidelity in over a decade.

      It comes down to whether you choose the funds and ETFs that brokerage produces, which usually I do. I have money diversified across 3 brokerages which allows me to pick and choose between fidelity, vanguard, and schwab with no costs. I buy schwab in the schwab brokerage, fidelity in the fidelity and so on. Instant no fees. I’d actually highly recommend always doing such actions, especially with a 401k in the mix. Buy as if your allocation is across all channels and buy using the cheapest channels for any class.

      Reply
    2. Dividends Down Under Post author

      It’s great how many affordable options there are in America – I don’t think we will ever have quite the number of good options here, purely because we have a much smaller population so the demand for competition isn’t as high.

      We are going to go with a broker who charges $11 per trade, which really is quite affordable considering Australia’s cost of living and the lack of competitive broker options.

      Mrs DDU

      Reply
  7. Mrs. ETT

    I was looking at CMC for when we start investing, based on Money Mag’s “Best of the Best” where they have won “Cheapest Online Broker” 5 years in a row (but also get comments about having a decent range of features.) CANSTAR has a list of what to look for in an online trading platform, so as long as they have the features you need then why not save money?

    Reply
    1. Dividends Down Under Post author

      Great to see another Aussie in the comments to talk to about this! CMC seem to hit the best of both worlds of having a very user-friendly platform but also affordable prices.

      Mrs DDU

      Reply
  8. Len

    I’ve been using Interactive Brokers for years and they are great. Probably not for the novice as their platform takes a bit getting used to but at $6 for Australian stocks and $1 for US stocks they are hard to beat.

    Reply
    1. Dividends Down Under Post author

      Hi Len, it’s great to know that there’s another option out there that might be worth a look. I think we’re pretty settled on a particular broker for now though, but worth storing in our minds for future re-assessment 🙂

      Mrs DDU

      Reply
  9. My Money Design

    Aren’t there any discounts through your broker if you have a certain amount invested? I know with Vanguard in the US if you reach certain asset levels, you start getting free trades for certain investments.

    Reply
    1. Dividends Down Under Post author

      Even if there were brokers with those discount levels for x amount invested.. I highly doubt we’ve reached any of those levels! Plus, we invest in individual stocks. Maybe worth looking into way down the line though – we’re at the early stages of building our portfolio, life curveballs have slowed down our rate of investing in the last 2 years.

      Mrs DDU

      Reply
  10. Luke@dollarwise

    CMC markets and IG are cheaper. I wonder though if it is subsidized by the far more profitable CFD trading wings of these companies. Plus you get all their in house advertising for these products. Something I hate, the CFD stuff that is! I guess the cheapest is the cheapest, but I have some ethical concerns with those companies. Dollarwise.

    Reply
  11. Mr. PIE

    Absolutely. Vanguard greatness has been built on low cost indexing. And investors can be great too if they pay attention to costs. We have a post on Monday with 5 soundbites from the CEO of Vanguard. And one of them, arguably the most important one, is on costs.

    If you are paying attention to costs, you are way further ahead than the average investor. Keep paying attention to that and you’ll be ahead of the pack for sure!!

    Reply
  12. Miss Mazuma

    Wow – I had no idea the fees were so high there! When I first started investing in individual stocks, I bought what I could when I could without regards to the fee…I have no idea what percentage I was paying! That only lasted a few transactions before I heard Robert Brokamp on Motley Fools Answers podcast advise that when investing in stocks to keep the fee to 1%. or under Vanguard charges a flat $7 per trade (for non vanguard funds/stocks) so now when I buy I make sure that the purchase is at least $700. But even if I invested $2000 it would still only cost the same $7. It helped me to have a guideline since I am not so great at the details!

    Reply
    1. Dividends Down Under Post author

      That’s a great way to do it. The broker we’re going to switch to does a flat fee of $11 or 0.1%, whichever is higher. Sometimes we do buy small parcels of $500 or $1,000, so our fee would be 2.2% on a $500 purchase – not great, but sometimes that’s all the cash we have available to do a stock purchase.. The good news is that is all much cheaper than we are currently paying!

      Mrs DDU

      Reply
  13. DivHut

    Commissions, maintenance fees, expense ratios, whatever you want to call them are all drains on our accounts over the long haul. Sure 1% doesn’t sound like a lot but over an investing career that’s 20, 30 or more years it can add up to serious $$$’s. It’s interesting to see so many new trading platforms that offer free or minimal trading options these days. I guess “high” commissions have hit a nerve with new investors. I remember when commissions were about $50 a trade and the full service brokerages charged $300 a trade. Now we have Robinhood, Loyal3 that are free and even Motif that allows you to buy 30 stocks for $9.95.

    Reply
    1. Dividends Down Under Post author

      I’m very glad we’re now in a time that has much more affordable options! before the internet trading would have been an all-mighty pain, I can’t even imagine trying to research purchases and look at up-to-date figures without the internet! (I think my millennial side is showing)

      Mrs DDU

      Reply
  14. Martin - Get FIRE'd asap

    Hi guys, I avoid paying the big 4 banks any more than I have to and when there are far more competitive options out there, I tend to drift towards them. I’ve used CMC and their rates are very reasonable if you don’t need any personal service.

    I’m also a big fan of Vanguard who are available here in Oz although their product offering is a lot smaller than what our North American friends can source. However, you can buy Vanguard EFT shares through a broker on the Australian Stock Exchange or set up an account with Vanguard directly which won’t cost any transaction fees. Their plans for less than $100k are higher than for EFTs but once your accounts exceed that threshold your fees drop dramatically.

    If you haven’t checked out Vanguard I suggest you do. My only down with them is that they don’t have a referral program so I don’t get a commission for telling you all of this 🙂

    Reply
  15. AustralianDividendInvestor

    Interactive Brokers in Australia isn’t bad. $6 a trade up to 20k or something ridiculous. Just be aware that the shares you buy aren’t registered with CHESS if you go with IB.

    Reply
    1. Dividends Down Under Post author

      Hey ADI,

      We really wanted the simplicity of being with a CHESS broker, but thanks for the heads up on interactive brokers, very affordable prices. Might be worth keeping in the back of our minds for the future if we ever want to reassess the costs and get them even lower.

      Mrs DDU

      Reply
  16. Dennis @ NestEggRx

    If you are buying stock, isn’t the evidence clear that buying index funds is better than buying individual stock or choosing an actively managed stock. I don’t invest in the stock market myself, but the last time I looked at it, it seemed that the evidence was clear. In that case, can’t you invest directly with Vanguard when you live in Australia?

    Reply
    1. Dividends Down Under Post author

      Thankfully there are stocks for every investment strategy, ours is individual stocks and LICs. I think the jury is still out on which one is the “best” strategy – it really is a personal choice and everyone gets different results.

      Mrs DDU

      Reply
  17. Mrs. BITA

    Oh wow, those are some expensive choices you have there.

    The bulk of my portfolio is in lox expense ratio Vanguard funds, so yay.

    I do hold my employer’s stock though, and the brokerage firm charges a flat $20 commission for a trade, irrespective of the size of the trade.

    Reply
    1. Dividends Down Under Post author

      Sounds like you’ve got the bad end of the stick there with the employer’s stock fees! They must be raking it in. We are paying $20 per trade right now but at least we have the choice to leave our current broker for cheaper options.

      Mrs DDU

      Reply
  18. Tawcan

    Boy those are expensive fees that you have down there. Questrade offers free ETF purchases so that’s something I try to take advantage of. Limiting transaction cost is important, that’s why I try to keep commission to less than 1% of the overall transaction.

    Reply
    1. Dividends Down Under Post author

      the less than 1% seems to be the magical number. Good to hear you have a free trade option, we don’t do ETF purchases so even if that were an Australian option we wouldn’t be taking advantage. Really glad to hear that you’re taking advantage of it though! 0% commission on a trade is always good.

      Mrs DDU

      Reply
  19. Andrew

    Wow I never knew trading commissions were that much higher in Australia!

    In my passive portfolio, I try to limit costs by going into cheap index funds that mimic the S&P 500.

    For my active portfolio, I don’t trade that much which limits my trading commissions. Also I try to buy in large enough chunks where the commission is less than 0.3% of the stock’s value.

    Reply
  20. Finance Solver

    I read your comment earlier about Robinhood coming to Australia. I can’t wait for you to try it!! It’s so great that they have it for free. I’m a little scared as to what their security is (and not going to be able to understand it anyway) but I haven’t had any issues so far.

    They also have robinhood instant where you get instant access to your funds up to $1,000 worth of transfers. The rest you will have to wait but it’s worked wonders! It’s a wonderful service!

    Reply

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