Managing Investment Expenses: They'll Add Up If You're Not Careful

Investing expenses can quickly eat into your earnings, especially if your portfolio is still relatively small. There are many types of expenses but the most dangerous to your portfolio are transaction costs, taxes, and investing information costs.

Transaction Costs

Transaction costs come in many forms but they all chip away at your returns, especially if your average transaction is small. This is how regular and online brokerages make money, they charge you when you buy and sell stocks, bonds or mutual funds.

These fees vary greatly, but one important piece of information I can share with confidence is that it is much more expensive doing business with a local financial planner or broker. They usually charge $35 or more per trade regardless of what type of investment you buy. In addition, planners will charge you for various services or by the hour, depending on the planner, and that can run into the thousands. They also tend to push the funds that pay them the biggest commissions. Beware the planner that ever pushes a fund loaded with fees and expenses, there's no reason to pay them now that you can trade them online for free (see the Mutual Funds Basics guide to learn more about No-Load Funds).

In contrast, the typical online trade is around $9.99 for stocks and most funds trade for free. Brick and mortar brokers and planners justify their much higher transaction fees by saying you are paying for their expertise, not just the transaction. Not many earn that extra money. Great investment advice is pretty cheap nowadays, some of the best investors in the world provide investment advisory services that cost less than $200 per year. There are always exceptions, so if your local planner is great, keeps fees low and outperforms the market, by all means, stick with him. While $9.99 online trades are much cheaper, they can still add up. Take my advice and keep track of all your fees, avoid local brokers and planners, and buy and hold as long as possible unless you've picked up a real dog.


Taxes are another large expense for those of us with portfolios in a taxable account. My first piece of advice is to stick every penny you can into tax deferred accounts (read the 401K, IRA and Roth IRA Basics guide to learn more about tax deferred accounts). This will allow your money to grow tax-free until you retire which will save you a fortune in tax expenses. If you can't put all of your savings into tax deferred accounts, the best way to keep your tax expense low is to hold your investments for as long as possible. Why? If you hold an investment for at least one year before you sell, you only have to pay the long term capital gains tax on the profit which is 15% for most of us and 5% in the lowest tax brackets. If you don't hold your investment for at least a year, you will pay your normal tax rate which can be as high as 35%. Long story short, buy and hold.

Investing Advice

The last category, investing advice expenses, consists of the price you pay for whatever type of investing advice you buy each year. It can consist of financial planning, website subscriptions, monthly investing newsletters, investing classes, and magazines subscriptions to name a few. I can't imagine how you would ever need to spend more than $1,000 per year to get great information. Spend even less if you are a beginner and your portfolio is still small because these expenses cut into a much larger % of your profit.

Of all the different types of investing costs, investing advice expenses are the easiest to manage if you do a little research before you buy. Here are a few tips to help you save money but still get the best investing advice available.

Keep up with the market and the economy:

  • A 12 month subscription to Smart Money published by the Wall Street Journal only costs $14.99 per year. This magazine contains outstanding content similar to the journal with a little more emphasis on personal finance articles than the Journal.
  • Kiplinger's Personal Finance costs $19.99 per year. Despite the title, this magazine focuses on both the market and personal finance. Great content plus a lot of educational material.
  • Money Magazine $14.99 per year. This magazine contains a little something for everyone, you can always count on each issue to emphasize a different aspect of personal finance and investing. Like this site, they shun the ivory tower mentality. Their publication is a fun and easy read and it always provide a lot of high quality educational content.
  • A weekly subscription to the Wall Street Journal is $99 per year. Heavy emphasis on everything market-related. They can tend to focus on what's hot but the Journal contains a lot of solid and timely analysis.

Investing Advisory services that provide specific buy/sell recommendations and model portfolios:

  • Equity Fund Outlook for Mutual Funds [may not be available any longer] $149 per year. Edited by renowned fund expert Thurman Smith. Emphasis split between tax deferred and taxable accounts. Provides strategy, model portfolio and specific buy/sell recommendations.
  • Fund Street and ETF World Investor for Mutual Funds and Index Investors $149 per year. Proven market beater that provides a lot of market analysis and investment/personal finance tools. Emphasis on long-term growth and Index/ETF funds. Provides strategy, model portfolio and specific buy/sell recommendations.
  • The Prudent Speculator for Stocks $195 per year. Market beater for over 25 years. This seasoned investing team is led by Al Frank's protege and successor, John Buckingham. Emphasis on growth stocks. Provides strategy, model portfolio and specific buy/sell recommendations.

Financial Planners:

  • If you feel you need a planner to get started, consider trying an hourly planner out rather than the more traditional fee-based planner. They claim you pay a premium for expertise so that's all you should use them for. Don't go through them to buy or sell stocks or funds, just get their advice at a reasonable hourly rate and don't go back if you don't feel you got your money's worth. Generally they are worth the dollars spent if you need help with advanced estate planning, insurance planning, or tax planning.

Investing Education Classes:

  • Typical investment workshops, seminars and courses cost anywhere from $1,000 to $5,000 and I've yet to see any material that you couldn't have gotten on line for free or at your local bookstore for $20. In addition to this site, there are many other similar sites that offer high quality free information on related topics. Why pay thousands when there's so much great free (internet) and inexpensive (bookstore) investing information available?

Data, charting, and investing analysis website subscriptions:

  • Hopefully you'd prefer to at least validate the recommendations you're getting from your advisory services. Since all investing research sites are different and can be tough for the newbie, I'm only going to recommend my favorite and most user-friendly, They have a great variety of free investing tools, so check out the free stuff before you sign up for the paid service. Even if you decide to buy, the subscription is only $14.99 per month and it includes exceptional tools for screening, researching, and selecting stocks and mutual funds. If you want to learn more, read, the Power of Institutional Investors at your Fingertips guide.
  • I highly recommend the approach above (i.e. learning to validate your advisory service's stock and fund selections), but if you don't plan on doing much of your own research and analysis, don't join a pay site. In-depth research and analysis services are wasted on the casual investor that simply buys the stocks, bonds and funds that his advisory service recommends. This type of investor will generally only need to look up quotes, charts, financial results, news and other basic information. If this is you, invest your money at any of the major online brokerages, they will have all the tools the casual investor will ever need.
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