Investing is associated with various types of expenses.<\/p>\n
Your goal as an investor is to keep these as low as possible.<\/p>\n
Investing Expenses<\/h4>\n
Below are a few examples of expenses you\u2019d accrue as an investor, but remember that this isn\u2019t a complete list:<\/p>\n
Not all are associated with every investment type, so let\u2019s dissect where they\u2019re applicable and how they can affect your portfolio.<\/p>\n
\nTotal Expense Ratio (TER)
\n<\/h2>\nThis is a cost you can\u2019t avoid.<\/p>\n
Whether you go with an index fund<\/a> or an ETF<\/a>, there will be an expense ratio. It\u2019s basically how the funds make money.<\/p>\nHowever, the fact that you can\u2019t avoid it makes it easier for the decision making process. Basically, find the one with the lowest TER<\/a>.<\/p>\nI\u2019ve seen S&P 500 tracker funds that ask for 1% management fee, while on the other hand:<\/p>\n
\n- \nSPY<\/strong> (SPDR S&P 500 ETF) has 0.09%,<\/li>\n
- \nIUSA\u00a0<\/strong>(iShares Core S&P 500 UCITS ETF (Dist)),\u00a0CSPX<\/strong>\u00a0(iShares Core S&P 500 UCITS ETF (Acc)) and\u00a0VUSA\u00a0<\/strong>(Vanguard S&P 500 UCITS ETF) all have 0.07%,<\/li>\n
- \nIVV<\/strong> (iShares Core S&P 500 ETF) has 0.04%, and<\/li>\n
- \nVOO<\/strong> (Vanguard S&P 500 ETF) has 0.03%.<\/li>\n<\/ul>\n
Find the cheapest fund available to you.<\/p>\n
\nEntry and exit fees
\n<\/h2>\nThese fees are more common with mutual funds and index funds<\/a>. The ETFs don\u2019t have enter and exit fees because they trade on exchanges, same as shares.<\/p>\nAlthough it\u2019s not common, have it in mind \u2013 if you see a number greater than 0.25% for enter\/exit fees for a index-tracking fund, look the other way. When it comes to index investing<\/a>, there are plenty of options where you won\u2019t have to sacrifice such a big part of your portfolio.<\/p>\nOf course, you can mitigate this costs by buying ETFs through a broker, but make sure that the overall cost will be lower.<\/p>\n
\nBroker\/bank fees
\n<\/h2>\nSince the ETFs are listed on exchanges, we need a broker in order to trade them. Some banks also offer brokerage services.<\/p>\n
Different brokers\/banks have different account fees. Some are yearly and some are monthly, some are a percentage of the investor\u2019s portfolio and some are fixed.<\/p>\n
Choosing the most appropriate brokerage service is quite a personal journey. But any proper assessment starts with listing the most reputable options available to people in the country you reside in. Only then filter them out based on parameters such as how much money you\u2019re planning to invest, how often, where you live, which ETFs are available, etc.<\/p>\n
Since you\u2019ll need to do some work yourself, if you\u2019re unsure about anything call them to get the answers with full transparency.<\/p>\n
My recommendation is Interactive Brokers\u00a0<\/strong>\u2013 a publicly traded brokerage firm headquartered in the US, available globally, and competitively priced. As a blogger that\u2019s not giving you a referral link, you know it\u2019s sincere.<\/p>\n\nTransaction fees
\n<\/h2>\nBrokers and funds also make money by charging commissions (or spread) on trades.<\/p>\n
These are one time costs associated with executing buy and sell orders.<\/p>\n
One time fees are less malicious than ongoing charges, but it\u2019s best if you can keep these low as well. Check if there are various types of accounts per platform because the trading costs may vary for different account types.<\/p>\n
I\u2019ll take DeGiro, a low-cost European broker, as an example. There is a certain transaction fee when buying shares and another for buying ETFs. However, they also have commission free ETFs which cost 0$ for the first purchase per calendar month. The details are irrelevant \u2013 I\u2019m pointing out that it can get quite specific to what you\u2019re willing to do.<\/p>\n
All of the costs are usually clearly stated on a pricing\/costs page for each platform.<\/p>\n
\nFX costs
\n<\/h2>\nDepending on the investments, there also may be foreign exchange costs.<\/p>\n
For example, if you\u2019re investing in EUR but owning US distributing ETFs, you might get your dividends in USD. Make sure to understand what conversion rates are used by your broker and also if there is a fee for converting.<\/p>\n
It\u2019s not related to the topic of this post, but I\u2019ll mention my recommendation of choosing accumulating funds rather than distributing ones<\/a>.<\/p>\n\nTaxes
\n<\/h2>\nI\u2019ll list some of the taxes and tax-related costs you should be familar with as an investor, but will cover them in separate posts:<\/p>\n
\n- Capital Gains Tax<\/li>\n
- Dividend Tax<\/li>\n
- Wealth Tax<\/li>\n
- Dividend Leakage<\/li>\n
- Double Taxation<\/li>\n<\/ul>\n
The first three (capital gains tax, dividend tax, and wealth tax) are the \u201cmajor\u201d ones and are crucial to understand before<\/strong> starting your investment journey.<\/p>\nTo read more about them, go to the post: Taxes for Dummies \u2013 How Tax Works?<\/strong><\/a><\/p>\nAlso, this is an amazing resource for comparing the capital gains taxes between European countries: TaxFoundation \u2013 Capital Gains Tax Rates in Europe (2022).<\/p>\n
Dividend leakage<\/strong><\/a> and double taxation<\/strong> come into play when you want to optimize your costs further, but I wouldn\u2019t call them crucial for beginners. Make sure to understand them thoroughly as your portfolio grows though.<\/p>\n\nConclusion
\n<\/h2>\nIf you want be an investor<\/a>, you will<\/strong> have investing expenses.<\/p>\nWhich means that you shouldn\u2019t be afraid of them!<\/p>\n
Trying to bring your investing expenses to 0 means that you\u2019ll never start investing<\/a>. I suggest not letting investment fear<\/a> make the worst investment decision for you \u2013 the decision of not investing<\/a><\/strong>.<\/p>\n
However, the fact that you can\u2019t avoid it makes it easier for the decision making process. Basically, find the one with the lowest TER<\/a>.<\/p>\n I\u2019ve seen S&P 500 tracker funds that ask for 1% management fee, while on the other hand:<\/p>\n Find the cheapest fund available to you.<\/p>\n These fees are more common with mutual funds and index funds<\/a>. The ETFs don\u2019t have enter and exit fees because they trade on exchanges, same as shares.<\/p>\n Although it\u2019s not common, have it in mind \u2013 if you see a number greater than 0.25% for enter\/exit fees for a index-tracking fund, look the other way. When it comes to index investing<\/a>, there are plenty of options where you won\u2019t have to sacrifice such a big part of your portfolio.<\/p>\n Of course, you can mitigate this costs by buying ETFs through a broker, but make sure that the overall cost will be lower.<\/p>\n Since the ETFs are listed on exchanges, we need a broker in order to trade them. Some banks also offer brokerage services.<\/p>\n Different brokers\/banks have different account fees. Some are yearly and some are monthly, some are a percentage of the investor\u2019s portfolio and some are fixed.<\/p>\n Choosing the most appropriate brokerage service is quite a personal journey. But any proper assessment starts with listing the most reputable options available to people in the country you reside in. Only then filter them out based on parameters such as how much money you\u2019re planning to invest, how often, where you live, which ETFs are available, etc.<\/p>\n Since you\u2019ll need to do some work yourself, if you\u2019re unsure about anything call them to get the answers with full transparency.<\/p>\n My recommendation is Interactive Brokers\u00a0<\/strong>\u2013 a publicly traded brokerage firm headquartered in the US, available globally, and competitively priced. As a blogger that\u2019s not giving you a referral link, you know it\u2019s sincere.<\/p>\n Brokers and funds also make money by charging commissions (or spread) on trades.<\/p>\n These are one time costs associated with executing buy and sell orders.<\/p>\n One time fees are less malicious than ongoing charges, but it\u2019s best if you can keep these low as well. Check if there are various types of accounts per platform because the trading costs may vary for different account types.<\/p>\n I\u2019ll take DeGiro, a low-cost European broker, as an example. There is a certain transaction fee when buying shares and another for buying ETFs. However, they also have commission free ETFs which cost 0$ for the first purchase per calendar month. The details are irrelevant \u2013 I\u2019m pointing out that it can get quite specific to what you\u2019re willing to do.<\/p>\n All of the costs are usually clearly stated on a pricing\/costs page for each platform.<\/p>\n Depending on the investments, there also may be foreign exchange costs.<\/p>\n For example, if you\u2019re investing in EUR but owning US distributing ETFs, you might get your dividends in USD. Make sure to understand what conversion rates are used by your broker and also if there is a fee for converting.<\/p>\n It\u2019s not related to the topic of this post, but I\u2019ll mention my recommendation of choosing accumulating funds rather than distributing ones<\/a>.<\/p>\n I\u2019ll list some of the taxes and tax-related costs you should be familar with as an investor, but will cover them in separate posts:<\/p>\n The first three (capital gains tax, dividend tax, and wealth tax) are the \u201cmajor\u201d ones and are crucial to understand before<\/strong> starting your investment journey.<\/p>\n To read more about them, go to the post: Taxes for Dummies \u2013 How Tax Works?<\/strong><\/a><\/p>\n Also, this is an amazing resource for comparing the capital gains taxes between European countries: TaxFoundation \u2013 Capital Gains Tax Rates in Europe (2022).<\/p>\n Dividend leakage<\/strong><\/a> and double taxation<\/strong> come into play when you want to optimize your costs further, but I wouldn\u2019t call them crucial for beginners. Make sure to understand them thoroughly as your portfolio grows though.<\/p>\n If you want be an investor<\/a>, you will<\/strong> have investing expenses.<\/p>\n Which means that you shouldn\u2019t be afraid of them!<\/p>\n Trying to bring your investing expenses to 0 means that you\u2019ll never start investing<\/a>. I suggest not letting investment fear<\/a> make the worst investment decision for you \u2013 the decision of not investing<\/a><\/strong>.<\/p>\n\n
\nEntry and exit fees
\n<\/h2>\n\nBroker\/bank fees
\n<\/h2>\n\nTransaction fees
\n<\/h2>\n\nFX costs
\n<\/h2>\n\nTaxes
\n<\/h2>\n\n
\nConclusion
\n<\/h2>\n
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