It's one thing to lose money to unpredictable stock markets; it's another to hand away hard-earned cash on fees and taxes. Here are five ways you can cut down on the expenses associated with investing.
INVEST IN ETFS.
Exchange-traded funds are a hybrid of stocks and mutual funds - funds that trade on the market. Because they are not usually actively managed, they come with significantly lower management costs than mutual funds. The management expense ratios are typically below 1 per cent on ETFs, while mutual funds generally start at around 2 per cent.
"And typically, ETFs have lower portfolio turnover, minimizing the tax consequences of potential capital gains," says Sloan Levett, director of wealth management for Fuller Landau LLP.
And because trades take place on stock exchanges, investors can cash out at any time without affecting the composition of the fund's underlying holdings. Mutual funds, on the other hand, sometimes have to sell underlying securities to pay back investors - creating taxable capital gains.
GET WHAT'S COMING TO YOU
Don't just focus on the fee side of investing, cautions Joel Neynens, vice-president of Gordon Stirrett & Associates in Halifax, because there are tax breaks to be had as well. Fees paid for investment advice on non-registered accounts can be deductible.
"One thing we come across in our practice is people not taking advantage of tax deductibility of certain fees in their investment accounts on a non-registered basis," he says.
"In order to maximize tax efficiency, it is important to seek qualified accounting advice if you have non-registered investment assets. My biggest point is that it doesn't make sense to only focus on the fee side of investing if you don't have a good handle on the tax side."
'LOW-LYING FRUIT'
Government programs can help investors keep more of their money in their pockets, and St. John's-based financial planner Joe Riche says investors who don't open tax-free savings accounts are potentially throwing cash away. The plans allow an individual to invest up to $5,000 a year, with any gains (be it from interest, capital gains or dividends) shielded from the taxman.
"I always talk about taking the low-lying fruit," says Mr. Riche of Riche Investments. "People say $5,000 isn't that big a deal, but the compounding effect over time makes it a big deal. That growth is tax free."
Investors with children should also open registered education savings plans, he says. The government will match funds at a rate of 20 per cent, up to $7,200 over the life of the plan.
"That is free money," he says. "You might as well take it."
DON'T OVERTRADE
Think about what you are doing before you hit the trade button - whether you are using a discount brokerage or going through your adviser. In either situation, the decision to make a trade is going to cost you money. Full-service brokerage fees per trade usually start around $70, and go up from there.
"The age of successful day trading has passed," says Sheryl Purdy, vice-president of Leede Financial Markets in Calgary. "Nothing burns through capital faster than clients who trade on their emotions. They have a bad day at work, or at home and take out their frustrations on their accounts.
"Listen to your broker when we gently try to dissuade you from doing trades. We can see what you're doing, and are trying to avoid you incurring extra trading fees because of this type of trading."
If you simply must trade, then shop around. QTrade Investor took top spot in The Globe and Mail's 10th annual online brokerage ratings late last year, mostly for keeping costs low and still providing the tools investors need to make wise decisions. A casual investor can make trades for less than $10, and there are no fees for mutual fund transactions. Other top performers in the survey included BMO InvestorLine, E*Trade Canada, TD Waterhouse and Credential Direct.
DIVIDEND RE-INVESTMENT PLANS
Dividend re-investment plans can be a good way for investors to accumulate shares without piling up fees. Under a plan, dividends aren't sent to an investor, but are instead used to purchase more shares from a company.
"A big advantage of DRIPs is that they usually allow for fractional share purchases," according to the Stingy Investor blog. "So, your $2 dividend can be used to buy 0.2 shares of a $10 stock. For the buy-and-hold investor, a DRIP is an easy way to deal with dividends."
Some companies even offer investors a discount, often 5 per cent, on new shares when the dividends are reinvested. However, in Canada you must have at least one share in a company to take part in a plan, and to do this you need to go through a broker. That usually means fees.
One option is to sign on with Canadian ShareOwner Investments, which will set you up with a DRIP for free. It will manage your dividends, and purchase fractional shares down to four decimals. This should mean that clients benefit from long-term share price accumulation, all the while amassing shares with their dividend payments.