Low Cost Trading

by | Jul 15, 2016 | Archives

Low and zero interest rates make the importance of keeping trading costs low even more important.  Today, a good investor has to work hard to get a regular 4% return on an investment.

Keeping costs down, especially if you trade small amounts can make a huge difference in your success.  If you pay a $20 fee on a $1,000 trade is 2% of the value.  You’ll pay another $20 when you sell, if your trade has broken even.  You have to make 4% profit just to break even.  A 4% return would be a zero percent return.

There is no universal system of fees charged by brokerage firms.  Some discount brokers charge as little as $4.95 for a common stock trade.  Others might charge $100 or more per trade.

This presents one hitch in the diversification strategy we teach in our Personal investing Course (Pi).   The recommended diversification is in as many as 20 country ETF shares.  The good news in the strategy is that trading is minimal, usually not more than one or two shares are bought or sold in a year.  Fees can be reduced compared to an active traderThe bad news is that buying 20 shares can create fees that are 20 times higher than investing in just one global ETF.

Statistically, if you have a long term horizon, your chances of better than average performance are still very high, but I wanted a way to reduce those fees!

The Test for Low Cost Trading

I wanted to find the very least expensive way to create and hold this portfolio so I performed a test.  First, I searched for an optimal way to buy and hold the diversified portfolio at the lowest possible cost.  The research revealed Motif,  a unique online broker that reduces fees on baskets of shares and appeared to offer the lowest cost way of investing in the Pifolio.

Motif Investing was founded by Hardeep Walia, a former Microsoft executive in 2010.

Motif Investing is an online broker that offers low cost thematic investing.  Motif Investing is a registered broker dealer and a member of SIPC.  Motif was recently ranked number one on Fast Company’s list of Most Innovative Companies in Personal Finance and has been recognized for two consecutive years on the CNBC Disrupter 50 list. The company’s investors include Goldman Sachs, JPMorgan Chase, and Renren Inc.  Board members include former Securities Exchange Commission Chairman, Arthur Levitt, and former Boston Consulting Group Chairman, Carl Stern.

Motif’s basic service allows investors to buy a portfolio (Motif calls the portfolio a “motif”) of up to 30 stocks or exchange-traded funds for just $9.95 per motif.

Motif looked as if it offered a great alternative but I have been cautious.   Big banks and brokers have been ripping off investors since stock trading began so we have to always invest with a buy beware attitude.  There are many ways that brokers can create hidden costs.

Because of this, I created a test to see if Motif offered a truly inexpensive service.

I use a community bank in Smalltown USA, United Southern Bank, to buy, hold and sell most of my shares.

I like community banks because they typically believe in strong customer relationships.  The bank’s officers live with the members of their community, some of them all their lives, and they know their customers and their businesses.  I prefer doing business with a bank that is locally owned and managed because they are more invested in my success as much as their own.

USB fees also happen to be a fraction of what is charged by some brokers and big banks.

I also like the fact that community banks are more likely to treat us as human beings (instead of numbers).  If and when it is needed it’s easy to go right to the top to answer a question or get a problem resolved.  There are no call centers and the bank and the person looking after my account is just around the corner.

I wanted to see how Motif purchase prices might compare with the pricing I received at USB.  Working with the bank’s VP in charge of trusts, I created two accounts, one at Motif and the other at USB.  I placed $40,000 in each.

I set up the order for the 17 country ETFs online, while the bank set up orders for the identical amounts of the same shares in his system. Then we got on the phone, coordinated our timing and on a count of three each pushed the button “BUY”.

good value portfolio test

Here is a breakdown of the cost of each purchase of the $40,000 I used at both United Southern Bank and Motif.

$ Price per share

Developed Countries

Share           Symbol           USB     Motif

Australia         EWA                $19.61   $19.56

Austria            EWO               $15.96   $15.93

France             EWQ               $25.26    $25.18

Germany        EWG                $27.19     $27.15

HK                   EWH               $20.35     $20.32

Italy                 EWI                 $14.44     $14.43

Japan              EWJ                $12.58     $12.54

Norway          NORW             $10.99     $10.91

Spre                EWS                 $10.65     $10.61

UK                  EWU                 $17.29     $17.25

Developing Countries

Brazil               EWZ                $22.78    $22.71

Chile                ECH                 $32.60   $32.44

China               FXI                  $37.69   $37.52

Colombia        ICOL               $10.42   $10.37

Malaysia         EWM               $10.83   $10.74

South Korea  EWY                 $53.69   $53.48

Taiwan           EWT                 $13.81    $13.75

Prices were the same within pennies, so using one or the other would depend on what is preferred:  dealing online or with the personal service of a small bank.

This test helped me confirm two ways of building a long term, globally diversified, high value portfolio of country ETFs in an exceedingly low cost way.

Gary

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