When you’re just getting beginning to dip into the world of investing in stocks, bonds and funds, you have a lot of advantages that might not immediately occur to you. For one thing, you have flexibility, because your investing horizons are so much longer. As a 25-year-old you can buy a stock or a fund and even if it loses 75 percent of its value, you can afford to sit and wait.
However, there’s one major stumbling block for the young investor – fees. Whether it’s the transaction charges from an online service like E*TRADE or ShareBuilder, or an actual broker or money manager’s fees, young people need to be careful they’re not losing all of their gains by overpaying.
The reason is simple – when you’re young, you have less money available at any given time than most people who are 10 or 20 years older. That means the fees eat into your principal a lot faster.
A simple example: you want to invest in GE (ticker symbol GE). You might want to put $1,000 into the stock, but you only have $100 available to invest each month. So every month, you buy $100 worth of GE shares , for 10 months. If you’re paying $10 – a pretty common fee – for each transaction, by the time you get to $1,000 of stock you’ve already spent $100, so you’re down 10 percent.
That means the value of a GE share needs to rise at least 10 percent over the average price you paid – which will change, possibly by a lot, over the entire 10-month period you invested. So you could see a 9 percent gain and still end up losing money, even though it might feel like you’re winning.
A richer, older investor, on the other hand, can just wait until the price looks good, then pull the trigger and buy $1,000 all at once.
One way to get around this is automatic investing discounts, like those offered by Sharebuilder. Sharebuilder lets you buy any number of securities every Tuesday at no charge, provided you enter the trade and provide the money by Monday afternoon. It charges $12 per month, minimum, for the service, but it lets you invest small amounts of money constantly at very low charge.
By setting up an automatic investing plan, you make saving for the future second nature, and you avoid the trap of losing money on transaction fees. Just make sure your portfolio gains at least $144 per year ($12/month for 12 months), or you’ll still end up in the red.