- Low or no-cost commissions
- More control over your portfolio
- Ability to invest with less money
The Real Costs of Free Online Investment TradingWhile 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 Year||Gain or Loss||Value of Account|
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) = $10,000In 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
The Pros and Cons of Investing on Your Own Versus Using a Financial ProfessionalPrior 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
- 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
- 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