Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Monday, February 8, 2010

The Downside of Lower Fidelity Fees

Many investors make a big mistake by not paying attention to investment expenses and taxes. These two costs can have a major impact on your net investment return. Commissions and advisor fees can exceed more than one percent of your portfolio, annually. Tack on fund fees that often exceed one percent, taxes and inflation and your net return may be only a paltry two or three percent on a gross return of eight or ten percent (if you are lucky enough to achieve that high of a return).

So it certainly appears that Fidelity’s recent announcement that it has reduced trading fees to $ 7.95 on all stock trades, eliminating its previous tiered plan that cost from $8 to $19.95 is good news. At the same time, Fidelity totally eliminated fees for online trades of 25 iShares ETFs (Exchange Traded Funds). This followed Schwab’s recent reduction of its online-trading commission by 31% to $8.95. Schwab also announced that it was introducing eight new ETFs that could be traded online without paying any commission.

Clearly these fee reductions were good news for investors who would like to add some core ETFs to their portfolio or who include individual stocks in their portfolio. We do see a potential downside to these lower fees, however.

If you view these lower fees as a big deal, it may be that you are trading too much. With such low fees, the total annual savings for most investors would likely not be all that significant unless they were very active traders. And some who have not been active traders in the past may now be motivated to trade more as they chase the latest hot asset class.

More frequent trading may negate the benefits of the lower fees and could very likely increase your tax liabilities. If done in conjunction with an effort to time the market, it will likely result in buying high and selling low. Market timing is extremely difficult to do. You need to be right twice. You need to buy at the right time and then sell at the right time. Doing either one of these at the right time is very difficult.

If you have a target portfolio and rebalance at regular intervals, we recommend you stick to your strategy. Rebalancing forces you to buy those asset classes that are under-allocated and sell those that are over-allocated. Be thankful that fees are coming down but don’t let lower fees tempt you to stray from your strategy and make the mistake of trying to time the market or chase that new hot investment being promoted every night on TV by some out-of-work TV celebrity.

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