Learning to distinguish winning from merely average stocks (and snapping up the former) will likely lead someone to obtain great wealth over time. That said, it’s not the only way of increasing investing performance. In fact, I think avoiding unnecessary costs is just as vital to boosting my eventual stock market returns. Here’s how I’m attempting to do just that.
Avoiding the tax grab
Holding my investments within a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) is a no-brainer for long-term investors like me. Doing so ensures I won’t pay any tax on the profits I make or any dividends I receive. While returns are far from guaranteed, the more money I retain, the more I can benefit from compound interest. All other things being equal, this should see me achieve far better returns.
Whether an ISA or SIPP is most appropriate will differ from person to person, of course. Any money held within an ISA can be accessed immediately. A SIPP, as one might have guessed, is geared towards saving for retirement. The fees for running each account can also differ substantially.
Speaking of which…
Limiting broker costs
Another way of boosting returns, at least in theory, is to minimise the commission costs I pay for buying or selling shares. A quick online search reveals that these can vary wildly between UK brokers. One charges as much as £11.95 per trade. Another charges £7.99 per trade. Sure, there are other things beyond costs to consider when selecting who to place trades with. But this doesn’t negate the fact that this difference in costs will add up over time.
However, I go one step further. Since timing the market consistently is so fiendishly difficult, I don’t even try. Instead, I automate the vast majority of my buying so that deals go through on the same day every month via my broker’s regular investment scheme.
In addition to taking emotion out of the equation, this strategy is also a far cheaper way of buying shares. One of my brokers charges just £1.50 per transaction. Another doesn’t charge any commission at all! This will save me potentially hundreds of pounds over an investing lifetime.
Sure, reducing the amount of commission I pay doesn’t guarantee stock market success. Nevertheless, it does increase the probability that my returns will be better.
Value for money
A final way I’m attempting to boost my performance is by checking that any funds I own represent the best value for money. This involves looking at the ongoing fees charged by the manager.
Naturally, the cost of owning a specific fund needs to be balanced with the return it’s likely to generate. A FTSE 100 tracker may be cheap to run (and involve less risk) but its returns over decades may be less than one that focuses on, say, quality UK small-cap stocks. The point here is to compare like with like.
Nevertheless, if the differences between an active and passive fund are minimal in terms of stocks held, I’d be very likely to opt for the latter due to the cost-saving I can make. Again, this could have a substantial impact on my eventual returns from the stock market.
Look after the pennies and the pounds will look after themselves – that’s the Foolish way.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.