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The cost of free online investment trading

There are many features about do-it-yourself online investment that can be appealing to some investors. These factors can include:

  • Low or no-cost commissions
  • More control over your portfolio
  • Ability to invest with less money

Going this route can be particularly enticing if you buy and sell investments frequently and take the time to do ample research before purchasing stocks, mutual funds, or other types of investments online.

But there can also be some expensive caveats, too!

The Real Costs of Free Online Investment Trading

While you may be able to invest online with no (or very low) commission expenses, there are other ways that doing this can cost you – and in some cases, it can impact your portfolio quite a bit.

For instance, even if you do your own research, it may not be customized to your particular situation and goals. In addition, investors can often get tripped up when looking at “average” versus “actual” returns.

In this case, even if an investment shows a positive average return over time, the actual value of your investment or portfolio can still be less than the amount of your original contribution. As an example, if you invest $1,000 and you have an average return of 0% over the next ten years, you “should” still have $1,000 in the account.

But that isn’t the case. In fact, you could end up with less than your original investment – even with a 0% average return. This is because any time there are negative numbers in the mix, the actual return and the average return will not be equal.

Portfolio Value with a 0% Average Return Over 10 Years

End of YearGain or LossValue of Account
110%$1,000.00
2(-10%)$990.00
310%$1,089.00
4(-10%)$980.10
510%$1,078.11
6(-10%)$970.30
710%$1,067.33
8(-10%)$960.60
910%$1,056.66
10(-10%)$950.99

Source: The Retirement Miracle. By Patrick Kelly.

Further, many people don’t realize that it can require a higher return in the future to gain back a loss (if the loss is even gained back at all). For instance, if you invest $10,000 and after the first year you incur a 50% loss, your portfolio value will drop down to $5,000.

However, if you attain a positive return of 50% in Year 2, the value of your investment will not go back up to $10,000. Rather, it will be just $7,500. In this case, you would need a 100% return in Year 2 to get back to even.

Year 1: $10,000 – $5,000 (50% loss) = $5,000

Year 2: $5,000 + 50% gain ($2,500) = $7,500

Return needed to get back to even: $5,000 + 100% gain ($5,000) = $10,000

In fact, the larger the loss you incur in your portfolio, the higher the future return needs to be in order to just get the value back to square one!

Percent Loss versus Percent Needed to Recover

% Loss% Gain Required
to Recoup the Loss

10%11.11%
20%25%
30%42.85%
40%66.66%
50%100%
60%150%
70%233%
80%400%
90%900%
100%Broke

The Pros and Cons of Investing on Your Own Versus Using a Financial Professional

Prior to using any of the free or low-cost investment platforms, it is important to consider both the advantages and the drawbacks. Some of the positives can include:

  • Low commissions and fees
  • Independence, freedom, and control over your investment decisions
  • Convenience

However, some of the potential disadvantages of do-it-yourself online investing can include the following:

  • Time and energy that are required for research and education
  • Lower overall returns (on average)
  • Less familiarity with tax laws and regulations
  • Potential for taking on more risk

Do-it-yourself investing can also lack some of the advantages that come with getting advice from an experienced financial advisor, such as:

  • Professional portfolio management
  • Asset protection
  • Advice for the “total financial picture”
  • Other financial and insurance products and services, including estate planning, insurance planning, accounting, and tax reduction strategies

Are You Ready for Professional Retirement Income Planning Advice?

Your retirement plan can be the most important arrangement that you make in your life. That is because it can guide you towards your specific future financial goals. This type of planning is far more involved than simply buying a “hot stock” or mutual fund.

At Annuity Gator, our focus is on educating investors and retirees on how to ensure that income in retirement continues for as long as it is needed – regardless of how long that may be. So, if you would like to determine the best route for you to take, based on your personal objectives, feel free to contact us at (888) 440-2468 or send us an email by going to our secure online contact form. We look forward to helping you map out your route to a financially secure future.

The cost of free online investment trading

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