How You Can Save Big Money On Your Stockmarket Dealing Costs - Part 1

Back in the January 2005 newsletter we introduced the 3 main foundations of solid, successful trading and investing -

1. Have a good understanding of what you're doing, what you're trading in and how the financial instruments really work
2. Understand the Risk/Reward ratio
3. Use common sense alongside trying and keep things simple

Well, there's actually a 4th and it's as important as the other three.

Keeping Costs Low

It's often been said that successful trading and/or investing is like any business, there are costs which have to be managed. Some of the best business operators today are savage cost cutters because they know it's one area where they have lots of control, and any reduction in costs normally ends up straight on the bottom line. Contrast this to an area which managers can't control with as much ease, selling more product. You can't often force your customers to buy.

Keeping costs low when it comes to investing is imperative especially as there are so many financial products that do basically the same job. These same products can often charge wildly different fees. A good example this would be a broad based stockmarket fund charging a 1.5% management fee and possibly a front-end load of up to 5%. A load is where the fund management company charges you money to buy into their products!

In reality many of these 'actively' managed funds are nothing more than closet FTSE 100 trackers. All they do is hide out in the big stocks and sectors like banks and oil which have such dominant weightings in the FTSE 100. It's therefore hard for these funds to under-perform and therefore for investors to get upset and move their funds elsewhere. These kinds of funds are always going to generally match the percentage moves up or down of the FTSE 100.

And for this mindless investing (you supposed to be paying them to think after all) the managers reward themselves outrageous fees.

Below we're going to look at four excellent ways to drastically slash fees when dealing on the stockmarket without diluting the potential of any upside gains.

1 - Use Tracker Funds

• Tracker funds are vehicles that 'track' an index or stockmarket sector
• This is done by buying in the case of the FTSE 100 all the stocks within the index in their relevant weightings
• The 'fund manager' would therefore buy more BP that ICI because BP is worth many billions while ICI is worth only a few billion
• We say 'fund manager' but in reality no investment decisions have to be made, ie 'should we invest more in BP or Shell and only a small % in banks because we expect them to under-perform'. No, just invest in what's in the index and their individual weightings
• Tracker funds are therefore very cheap to manage and operate
• Tracker funds are also available on the major indexes, so you can buy them for the banking sector or the 'oil sector' etc
• Charges for tracker funds should be around 0.5% or less, Fidelity for example now charges 0.25%-0.3% for it's FTSE Index tracker fund

Tracker Funds Summary

Watch out for fees on tracker funds because they are all the same, XYZ fund management company's tracker on the FTSE 100 WILL perform (give or take a few 0.01%s) exactly the same as the tracker fund offered by the XYZ fund management company. But some firms will often charge double or even triple the fees than that of a competitor. Bottom line, always invest in the tracker with the lowest fees.

2 - Use Fund Supermarkets To Buy Funds at up to 75% Discount

• We wrote at length about Fund Supermarkets back in the July 2005 newsletter
• Basically, if you buy a fund through a supermarket then you'll get a drastically reduced front-end load, perhaps 1%-3% versus 5% if you bought the fund direct
• Note, that all funds bought through a supermarket are exactly the same as if you bought them direct