Reader Frank had this comment regarding the need to set up stop losses:
I have been reading your column and understand the need for the trailing stops; however, the cost to transact at brokerage houses or the redemption time period at mutual fund firms are additional costs that must be considered and could become prohibitive in some cases.
Do you have a favorite place to transact so that these additional fees will not excessively burden the transaction?
Sure, all brokerage firms have some type of transaction costs when it comes to ETFs and early redemption fees with respect to mutual funds. However, that is totally unimportant when it comes to implementing a sell stop strategy because the risk of staying in the market at crucial turning points as opposed to getting out can be very costly as the last year has shown.
Trading costs have become very inexpensive but vary depending on where you keep your account. I use Schwab and selling an ETF typically costs 12.95 (but can be as low as 9.95) while the early redemption fee for buying and selling a mutual fund within 90 days is $49.95. Some custodians like E-Trade may have even lower fees.
Again, I need to stress that nowadays the costs of getting out of a position are not prohibitive in scale; what is prohibitive is staying in the market when trends turn south again and watching your portfolio values evaporate.
Transaction fees are part of life but, when used in conjunction with a sell stop discipline, they fulfill the function of portfolio insurance to assure that you can survive treacherous market conditions.
Comments 12
To keep transaction costs down, use a discount broker. My broker only charges $ 5.00 for a market order, so I don’t worry about the cost. I never buy mutual funds since there are often fees that will make you think twice.
ScottTrade, E-Trade and TDAmeritrade all have low fees for ETF and other stock transactions.
You can negotiate Schwab down to $7.95 at least.
Jason,
I doubt it; unless you have over $1 million housed with them.
Ulli…
Perspective:
If your investment to trade is $1000 and your trade fee is $10, then your trade fee is 1% – significant to the person with the $1,000.
If your investment to trade is $100,000 and your trade fee is the same $10, then your trade fee is .01% – insignificant.
I use Scottrade and have for a few years now. I had Schwab for a long time before they slapped on account fees. I then transfered all my accounts along with my wife’s and Son’s who lives in other States to Scottrade and it was a wise choice and they have many mutual funds with no commissions if held 90 days or more and a $17 commission is sold less than 90 days. They allow RYDEX funds to be traded without any commissions or minimum holding periods. Their ETFs are $7 per trade no matter how many shares are traded. Sometime later after I made the switch to Scottrade, Schwab removed the account fees imagine that. Scottrade has a lot of branch offices around these days and that is a good thing. The above commissions were based on trading online not thru a broker at Scottrade, which costs a lot more.
Anon,
I disagree. It’s still insignificant, if the trend heads south as it did last year. I bet there are millions of investors who would have gladly paid any fee in order not have gone down with the market.
Ulli…
Ulli,
Sorry for the confusion. I totally agree with what you are saying. The trading fee is nothing compared to losing your shirt.
Apparently, my comment about the “perspective” should have been reserved for another topic. It was intended to highlight the percentage of the cost to perform a trade based on the investment value. Several comments were made in this post related to the “cost” for the trading fee.
If you have $1,000 to invest and the trade fee is $25, well it is 2.5% of the investment. If it is $6, then it is a more palatable 0.6%.
If your investment capital is much more – say $100,000, whether the fee is 0.025% or 0.006% is not significant in my mind.
Psychologically, if the trend changes for the worse and your sell stop rules say “get out now”, I would think that if you have the larger investment, the trading fee of 0.006 or 0.025% will not be a deciding factor in the sell decision.
If your at the lower end of the spectrum, you may think twice about following the sell rules if your trading cost is 2.5% of your investment – and it should not be a factor.
Regards,
Dan (Anon)
Dan,
Thanks for the clarification.
Ulli…
I use Thinkorswim as broker. $5 for stocks and ETFs. I never buy mutual funds which are sucking public money in vacuum in the form of fees. $2000 ETF and $5 fee = 0.25% is far better than pay 0.5%(fidelity) or 0.40-0.70% at others for index funds!!
Another broker is Interactive brokers, Tradeking etc
on a slightly different topic…
anyone have any experiences/opinions about smartstops.net?
Well I use Wells Fargo Investments for 2 years. Other then getting switched over yu get yur first 100 trades a year as a freebee. It was a toss up with Bnk America (yeah that one). I read about both of these in an article. BkAmerica has/had like 25 or 50 free trades per month. I was going with them but all my other finances were at Wells so having it all under one hood was so easy. One sign on to see everything, savings, checking, investment accounts. Of course that was before St. Valentines day as the investment side is just that a different outfit and not an FDIC. Both of these are way superior for a small bloak under a 1/2 mil. For the real traders among yu International Brokers is a very cheap rate per share and that is what many, many investment outfits use to keep that trade cost to a minimum. I have traded a lot the past 2-3 years and hasnt cost me a dime with Wells LLC. No real support though nothing like the rolls royce that Schwab has but hey when they raised it to $12.95 I hit the bricks. I use to have Ameritrade but dumped them to consolidate at scwab. Its probably best to have 1/2 at Wells & half at BkAmerica (current atmosphere notwithstanding). These outfits had the investment arms set up a couple years before the implode. I switch my moeny back and forth with just a click between the investment arm and my savings/checking account at the bank since they are all on the same page.
FYI,
I am on broker number 4 in the last 8 months. I guess it’s the learning curve.
I just moved to Trade Station and find the fees are cheep. Max $8.00.
Most trades are $1.00 per hundred. The program and search engine are awsome and they have a 60 day free trial. It will take about four weeks for a newbie like me to run the program well but it has made me money by working correctly every time.
Good Luck