As investors, we are always chasing a higher return. For example, we may look back on certain share purchases and feel as though we should have waited a little longer before buying, or bought earlier so as to obtain a better price. Similarly, hanging on for an extra 5% or 10% extra gain could have been a wise move at times, as could selling while the going was good in other cases.
However, instead of focusing on the judgment calls that are part and parcel of being an investor, it can make sense to focus on the logistics of investing when attempting to obtain a higher return. Certainly, trying to improve as an investor and being better able to time the market, select the best companies and unearth the best value opportunities are noble aims. But, by changing the way in which you operate as an investor, you could achieve even higher returns.
For example, commission remains a relatively high cost for investors even though the internet has cut its cost substantially. These days, being charged between £12 and £15 per trade seems to be the norm and almost all investors seem comfortable in factoring this cost into their return outlooks.
However, there is a much cheaper way of buying shares: aggregated orders. This simply means that instead of your shares being purchased when you click your mouse button on ‘buy’, your order is combined with other client orders and executed on a specific day. For example, you may click ‘buy’ in your online account on Tuesday and the order goes through on Thursday and, helpfully, you can obtain a list of future dates when aggregated orders will be executed.
Although slightly less convenient than buying shares on the spot, aggregated orders cost £2 or less each. This equates to a saving of over 80% on commission charges and, in the long run, can make a real difference to your portfolio returns and, best of all, almost all major online stockbrokers offer such a service.
Aggregated orders also encourage greater diversification, since the cost of dealing is so much lower than it otherwise would be. Diversifying is a great way to improve returns since it reduces company-specific risk and means that your chances of loss from the decline of one company’s share price is vastly reduced. For example, if you only hold ten stocks in equal amounts and one of them halves in value, your loss as a proportion of your total portfolio will be 5%. However, if you hold 40 stocks in equal amounts then in the same scenario your total loss will be just 1.25%. In the long run, such differences can make a big impact on your returns.
Finally, commission costs can be further cut by dealing less often. Clearly, this is not designed to be to the detriment of diversifying, but holding shares for a number of years means that dealing charges will inevitably be cut and, in addition, buying and holding allows the companies in which you are an investor to deliver on their long term goals and this should lead to improved profitability, both for the company and its investors.
Certainly, short-term trading may be exciting and appeal to all of our ‘animal spirits’. But, realistically, the only real consistent winner is likely to be your stockbroker as you rack up more and more commission charges and never give the companies in which you invest the time to fulfil their potential.
