3 Ways to Streamline Your Investment Decisions

June 30, 2015

ForkInTheRoadWe often hear from investors who get sidetracked by a particular trade.

One investor went to buy a fund only to find out that her broker charges a transaction fee for the fund, and she wasn’t sure if it was worth paying a fee to own the fund.

Another investor needed to sell a fund, but he held the fund in a taxable account and he was wary of realizing a taxable gain.

Fees and taxes can eat into your returns so it makes sense to factor them into your investment process, but they shouldn’t stop you from making necessary changes to your portfolio.

It helps to make some decisions about fees and taxes up front. This is what we do in our client accounts. We consider the potential fees and restrictions that client may face, and then we decide in advance how we’ll handle them. This way we streamline our monthly decision-making process, and we avoid having to make the same decisions again and again.

You can do the same in your portfolio. Here’s how:

1. Know Your Broker

No one likes getting hit with an unexpected fee. So take some time to review what fees your broker charges. The most common trading fees facing fund investors are transaction fees and redemption fees.

You’ll want to understand how your broker identifies funds that have no transaction fees (NTF) versus funds that have transaction fees, and make sure you know if your broker charges you a transaction fee only when you buy a fund or also when you sell it. This table is a good place to start.

Broker fees and policies do change over time. Fidelity, for example, now charges $75 for some transaction-fee funds and $49.95 for other transaction-fee funds; most major brokers have just one transaction fee. In 2015, Vanguard’s brokerage services shortened its redemption-fee period from 180 days to just 60 days.

2. Limit Trading Costs

Once you know how much you broker charges for transaction-fee funds, you can decide whether to pay these fees. Transaction fees have a bigger impact on smaller accounts, so if you are managing a more modest account, we suggest avoiding transaction-fee funds and focusing on no transaction-fee (NTF) funds.

If you are buying transaction fees, decide how much you are willing to pay as a percent of your purchase, and then stick to that rule. In our client accounts, most of the funds we use are no transaction-fee (NTF). When we buy transaction-fee funds, we try to keep transaction fees under 0.5% of the position. We looked at when to pay a transaction fee here.

Both funds and brokers may charge a redemption fee for selling shares within a certain time frame. We hold funds a minimum of 90 days, which helps us avoid nearly all broker and fund redemption fees, and it reduces turnover.

3. Take Taxes into Account

If you are managing a taxable account, there are a few additional considerations. You’ll want to consider holding funds longer to realize long-term gains, since long-term gains are taxed at a more favorable rate than short-term gains. If a fund we own in a taxable account falls into the sells, we consider the size of the taxable gain as well as how long we’ve held the fund.  If it’s a decent gain and we’ve held the fund 10 months or more, we’d likely continue to hold the fund until the capital gain becomes long term. If the gain is fairly small and if we’ve held the fund less than 10 months, we’d be more apt to sell it.

We also look to book tax losses, which can be used to offset gains. We shared more details about what we consider when we manage a taxable account here.

Once you have these decisions made, you’ll know what to do if you discover you’re facing a broker fee or you’re realizing a taxable gain, and you’ll be more likely to take action when needed to keep your portfolio in top funds.

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