5 Ways To Apply Frugality To Investing
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This piece was provided to Savvy in Somerset by Financial Expert.
If you’re serious about saving money for the long term, you probably have money tucked away in plenty of different places; your current account, savings accounts, savings bonds, maybe even National Savings & Investments (NS&I).
5 Ways to Apply Frugality to Investing
If you are seeking higher returns, you probably have a Stocks and Shares ISA, which allows you to invest in shares, bonds, or units in funds (which indirectly own these interesting assets).
I’m a firm supporter of investing, and I would like to encourage more people to find a better place than a cash ISA for their retirement savings. This is precisely why I began a website to host free investing courses for beginners, to break through the barriers to investing.
For the beginner, investing is a huge step up in terms of complexity and the number of choices. It never gets simple, even for experienced investors such as myself!
Investing can be expensive
One of the new challenges which beginners are presented with is the wide array of fees that you can be charged by stockbrokers or fund managers. These include:
- Platform fees
- Administration fees
- Initial fees
- On-going management charges
- Trading fees
This is a world apart from savings accounts, which are usually completely free to setup. Even if you close your account, banks usually don’t deduct a penny from your deposit with them.
Frugality may encourage many to stick with the ‘fee-free’ options. However, the average returns from investing (which can range from 5-8% per year depending on level of risk) more than outweigh any fees paid.
You don’t get what you pay for
Investing is perhaps the only, and I’ll repeat; the only environment in which the more you pay for a service, the worse service you’ll receive.
This is because of two reasons:
1) While investment professionals claim to have incredible foresight, studies have shown that only a slim minority consistently outperform the average. In other words, investment professionals do not add value through their judgement. Embarrassing for them, but true.
2) Therefore, the value created by ‘investment professionals’ is non-existent. It follows that there is no benefit in choosing an expensive one. An extra pound spent on investing costs is a pound wasted and has simply reduced your pot of money.
This is where the concept of frugality appears in a big way. Being frugal when investing is one of the chief determinants of how successful you will be. If you can apply the same discipline to your investing, as you already achieve in your household budget, you’ll be set for success.
So here are my 5 ways to be frugal when investing.
1. Never pay an initial fee to invest in a collective investment such as a fund.
Initial fees were once commonplace, but are now in the minority. This means that any investment strategy can be had through a fund which charges zero to investors at the door.
If you see an initial or ‘load’ fee, shop around until you find a free option.
2. Don’t fall into the trap of placing frequent trades to unlock a fee discount
Stockbrokers such as Hargreaves Lansdown will charge investors £11.95 for a single trade but offer a reduced rate of £8.95 if you make more than 10 trades per month.
This might appear to be a money-saving offer, except that the discounts kick in at a very high level of trading. An investor must be spending at least £89.50 per month to qualify for the discount – that’s £1,000 per year!
I would suggest that a frugal investor could limit themselves to 2-3 trades per month and spend only £24-£36 instead.
3. Don’t chase the cheapest broker on any individual measure
Comparison tables exist which allow you to compare and contrast the trading fees and account fees of numerous brokers online. This encourages investors to filter by the fee type and pick the lowest cost broker.
In reality, the costs of investing are a combination of account fees and trading fees. The cheapest broker for trading may gouge their customers with an annual charge. Therefore, the only proper comparison will be to forecast your annual number of trades and calculate a ‘total cost’ for each provider to compare.
You may find that the cheapest broker for you, was actually mid-table on any single metric.
4. Don’t panic sell
If anyone enjoys a financial market panic, it’s a stockbroker. As prices jolt up and down, investors begin to panic sell (or alternatively jump on perceived bargains). Trading volumes increase and stockbrokers generate plenty of fees.
What’s good for a stockbroker is rarely good for their customers. When the waters get choppy, stay the course and resist the urge to change your investment strategy.
One of my favourite sayings is ‘An investing cost is an investing loss‘. This phrase tries to encourage the mindset that every penny you hand over has reduced your investment portfolio value. So by even trading out of the market during a crisis, you might think you are protecting your money, but you are already guaranteeing a loss – the fees you hand over!
5. Price check any fund manager against its peers to ensure it’s providing good value for money
Investment funds carry ‘ongoing management charges’ which are how the fund manager receives an income.
Let’s just say that from the way these charges vary – there is a large range in how well fund managers are living!
The cheapest fund in the world is Vanguard’s S&P 500 fund which invests in US shares. Its annual charge is less than 0.1%. In contrast, I have seen small ’boutique’ funds which charge 1.6% per year.
Can that be justified? From an economical standpoint, I can appreciate why a small fund may need to charge a higher % to cover their overheads – but don’t let yourself be the chump who has to pay for them being too small!
Compare the ‘Fund Factsheets’ for similar peers of any fund you’re about to invest, and challenge hard whether there’s any justification for not picking the lowest cost option.
About the Author: Simon writes the content within the free investing courses available at Financial-Expert.co.uk. It’s an informal blog which takes beginners at their own pace through each aspect of investing. The most popular article is how to invest in shares.
