How can I prevent commissions and fees from eating up my trading profits?

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Glad you are asking this question. Minimizing commissions and fees can have a HUGE impact over the course of your entire investing career. Here are 3 ways:

- Invest in Exchange Traded Funds (ETFs) rather than Mutual Funds. The expense ratios are almost always lower for an ETF versus a comparable mutual fund. It is now very easy to build a low cost, well diversified portfolio using ETFs with an expense ratio of 0.25% or less per year.

- Avoid products with front-end loads, back-end loads, or 12b-1 fees. These are typically found within Mutual Funds, but not ETF's. Read the fund's prospectus to know whether these fees are associated with any product you are investing in.

- Seek out ETF's with no trading fees. Many asset custodians charge between $7.95-$9.95 per trade, however, a growing number of fund families are waiving trading fees on their ETF's.  As an example, Charles Schwab offers a full range of ETF's that have no trading fees.

- If you do decide to invest in a fund with a trading fee, try to invest over $1,000 per fund. To keep the math simple, let's say you are investing in a fund that charges $10 per trade. If you invest $1,000 in that fund, you will pay 1% ($10 out of the $1,000) for your initial investment and another 1% when you sell the fund for a total of 2%. However, if you are only investing $100 in the fund, you're paying the equivalent of 10% for the initial investment ($10 out of the $100) and another 10% when you sell for a total of 20%. You'll need to earn an awful lot of return to overcome those trading costs!

- If you decide to work with a financial advisor to help you with your investments, look for one who charges 1% or less of Assets Under Management for their services.

Thanks for the great question and good luck keeping those fees to a minimum so you can keep more of your money growing in your accounts on your behalf!

With Kind Regards,

Dave

July 2008
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