How to Cut Your Investment Costs in 2014

There are many choices to investing, perhaps more than ever before. Online resources provide real time updates on performance, while social media and news programs tout eye popping returns.

Since major indexes such as the S&P 500 and NASDAQ have soared in recent years, some investors are forgiving or oblivious of investment costs. These expenses are crucial to optimizing your returns through various market conditions.

The primary culprits are taxes, commissions and fees. Each of these investor expenses can be minimized through some planning and perspective.

Here are some best practices to consider:


You can reduce capital gains by how and when securities are sold. The higher short term gains rate is incentive to hold appreciated stock beyond 1 year.

With the top cap gains rate rising to 20% in 2013, managing your tax bracket is even more important. The tax efficient approach used by Elliott Broidy to manage hedge funds is available to smaller portfolios as well.

Investors should evaluate the below options when selling investments:

Tax Loss Harvesting

Up to $3,000 of capital losses from selling underwater investments can be deducted from your AGI. Any balance is carried forward to future years.

If you’re selling appreciated securities, consider selling underperformers to offset cap the capital gains. Tax loss selling provides financial benefit from purging your portfolio of underperformers.

Specific Identification

When stocks or mutual funds are sold, the IRS taxes the shares that were purchased first.

These shares may have low cost basis, meaning your capital gains liability is higher. You should review and identify specific shares at a higher cost basis when selling. Mutual fund companies and brokers will have these records available if needed.

Investment Fees

A bull market can mask high expense ratios or brokerage fees. Thankfully, there are cost effective choices with strong histories through all market conditions.

Mutual Funds

Expense ratios greatly impact your net mutual fund returns. Sector funds and overseas investments in particular have relatively high expense ratios. Unfortunately, the majority of actively managed funds underperform benchmarks, such as the NASDAQ or S&P. Some of this is attributed to higher trading costs and manager salaries, which are passed on to shareholders in the form of higher expenses.

2014 is a chance to review your mutual fund costs. When the market corrects or cools, high expense ratios make it even more difficult to outperform. Consider index mutual funds that mimic broad indices. You can choose from indexes of most asset classes, market caps and overseas markets. This makes it easy to match your time horizon and risk tolerance.

Exchange traded funds (ETFs) may also be appropriate. ETFs trade like stocks with low management expenses. You can minimize brokerage commissions through discount brokers.

Unlike open ended mutual funds, ETF prices will fluctuate through the trading day. Investors who seek trading flexibility may favor ETFs for margin accounts or basic hedging strategies. Conversely, mutual funds are more suited for passive investors.

Brokerage Costs

Many portfolios have grown substantially in recent years. Your balances may now qualify for reduced fees at brokerages.

Smaller investors should check if balances have outgrown their current cost structures. With the bull market, some brokerage houses have realized economies of scale to lower costs for smaller accounts.

As trading and investment needs become more advanced, ensure that your current platform offer the best ROI.

Summary- Investment Costs Matter

Managing your investments includes cost considerations. Strong equity markets cause some investors to lose perspective on long term goals and expenses. With periodic review, you can optimize investment costs for a better portfolio.