Ask Terry Questions Investing and commissions

Investing and commissions

By Terry Savage on May 09, 2015 | Investments

Hi Terry, I was wondering if you know of any rules of thumb as far as a recommended minimum purchase amount for stocks based on the commission charged? For example I have a self directed account within my 401K that I use to hold individual stocks and ETFs (usually for 6 months or more) but the commission is a rather high $15 (actually $15 is not super high compared to the old days but I’m used to paying $7 or less per trade in my non-qualified brokerage accounts). Unfortunately I don’t have an option to switch to a lower brokerage fee account in my 401K (until I switch jobs or retire). With the average returns on equity and other investments trending lower lately (compared to the past few years) I feel if the brokerage fee on the buy and sell order is more than 0.5% of the investment that can be a real drag on the portfolio returns especially when buying ETFs that charge 0.5% fees or more.

Terry Says:  You’re right, of course.  Fees do have a HUGE impact on returns, over time.  So the answer is obvious:  use your 40l(k) plan for long term investing.  I’m sure they have low cost funds from Vanguard or Fidelity as choices for your long-term, buy-and-hold goals.  Then use the money you have outside your plan to do your trading — at a low-cost discount brokerage firm.  And remember, excessive trading ALWAYS generates excessive fees — even if they are low ones!   But at least outside your retirement plan, you can use the losses to offset the gains.



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