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We all know that investing in the stock market is one of the smartest ways to grow your wealth. What is less well understood is how seriously excessive stock trading can harm the overall returns of an investment portfolio.
Recent Personal Finance Website Searches finder.com, examines the wildly different fee structures that exist on many trading platforms. It also highlights how, over time, regular transactions can incur huge fees, inhibiting long-term wealth generation. Let’s take a closer look at some statistics.
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A typical investor
An average investor makes 38 trades a year, buying or selling an average of £1,762 worth of shares with each trade. It looks like a big sum of money. However, most of this money is recycled. Such a trade does not seem too excessive.
A problem arises when considering the most actively traded stocks on UK trading platforms. These include the likes of Apple and You’re here. Therefore, additional costs must be taken into account. Their research points out that regular trading in US stocks could cost up to an additional £32.67 per trade, depending on the platform used. This equates to an annual trading fee of £1,241!
This is not the end of the story. Depending on the UK broker an investor chooses, the fees for trading US stocks can vary significantly. Over a decade, the difference in fees between the most expensive and the cheapest is over £12,000!
If it is possible to paint a more terrifying picture, then consider the position of a young investor who is trading a similar pattern over the next 40 years. They would end up paying an average of £25,660 in fees. Indeed, for one platform, the costs amount to more than £50,000!
Moral of the story
A clear conclusion that emerges from this research is how, over a lifetime of trading, fees can really add up. And often without us realizing it.
The obvious way for an investor to prevent excessive fees from derailing their investment return is to take a long-term investment approach. Indeed, that is what we advocate here at The Motley Fool.
Warren Buffett, arguably the greatest investor of all time, has a very simple strategy. His default holding period is eternal. He is not alone. Terry Smith, Fund Manager of Fund Founder summarized his investment strategy as follows: “Buy good companies, don’t overpay and do nothing”.
Applying such a simple strategy seems easy but is rarely executed well by most investors. But over long periods of time, history shows that the stock market works in an investor’s favor. As Benjamin Graham liked to say, in the short term the market is a voting machine, but in the long term it is a weighing machine.
At The Motley Fool, we advocate one of the fundamental concepts of investing, namely “staying the course”.
When opportunities to invest in quality companies arise, savvy investors seize them. They know that time is the friend of wonderful investment. By holding stocks through multiple business cycles, as well as compounding dividends, an investor minimizes fees and is more likely to increase overall returns.