How to cut the cost of investing
Investing in the stockmarket can be a great way to grow your wealth - as long as you don't end up handing your gains over in fees.
When you start investing money it's easy to get caught up in the hunt to find the best performing assets, but cutting the cost of investing can also help improve your returns.
One of the easiest ways to reduce your costs is to trade online. Human contact only increases your expenses and could leave you in the hands of a smoothie with a script, and a mission to fatten their own bank balance rather than yours.
Also avoid trading directly with a fund provider – strange as it sounds, it costs you more than using a third party, as you won't benefit from any initial reductions on charges.
Depending on whether you want to buy and sell shares or funds you can choose between a fund supermarket or an online discount broker. Much like a traditional supermarket, a fund supermarket buys in bulk and passes on the savings to its customers. So you can make savings on your initial investment charge and annual management fees.
It's also possible to buy and sell shares for about £10 a share with online brokers, while some traditional stockbrokers still charge over £50 per trade.
If you're happy to make your own decisions, also go for an ‘execution-only' broker as they just buy and sell shares as per your instructions so there's no adviser wages to pay.
The type of investment product you choose also reduce costs. Tracker funds are a great low-cost choice. The idea is to replicate a particular index, such as the FTSE 100, instead of trying to beat it. This means you don't have to pay the salary of a fund manager to actively manage the portfolio - it's all done by a nice cheap-to-run computer instead, so the costs are much lower. Typically, you will pay an annual management charge of 0.5%, rather than the average 1.5% for a fund run by a manager.
Another low-cost option is exchange-traded funds, known as ETFs. Like a tracker fund these aim to track the performance of a particular index, the difference is they are traded on an exchange like a share. This means you will have to pay stockbroking fees to invest in them but they will still work out cheaper than an actively managed fund.
Finally, don't forget to utilise your ISA allowance. Returns on investments held within an ISA are free from income and capital gains tax so while you won't save any money when you put your money in you'll make big savings in the long run.