Focus on Cost

In our article about the time value of money, you learned that small differences in the rate at which you compound your money can dramatically effect your ultimate wealth. Consider that an extra 3% return annually can result in 3x as much money over 50 years!

The safest way to try and grab an extra few percentage points of return – as in the case of any good business – is cost control. If you are enrolled in a dividend reinvestment program, or DRIP, that charges $1 for each investment and you are putting away $50 per month, your costs are immediately eating 2% of your principal. Likewise, when you buy shares of mutual funds that charge a sales load, you can end up with only $0.94 of every $1 you contribute working for you – the first year of your investment is spent just getting back to where you started! That’s not a recipe for success.

Here are some quick tips to help lower your investing costs

• Find a broker that offers low-priced execution. Why pay $50 plus a percentage of the trade when you can pay a flat $9.99?
• When dollar cost averaging, if you only have a small amount of money to invest, consider contribution on a bi-monthly schedule instead of a monthly schedule. In the case of the example we already gave, $100 ever two months instead of $50 every month would cut your expenses to 1% from 2%.
• Keep your trading frequency low. Every time you buy or sell a position, that’s another commission you must pay plus the market makers spread (this is the difference between what the person who sells a stock and the person who buys a stock pays; it goes to the specialists who sit at the stock exchange and make sure shares are traded orderly so that the market remains liquid).