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  • Is trading too often a costly mistake?

    We look at why buying and selling shares too frequently could cost more than you bargained for.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    When it comes to investing, sometimes doing nothing can be harder than doing something.

    Even the most experienced or level-headed investors will find themselves dragged into the ups and downs of the market, reacting to short-term noise.

    When we allow these short-term ups and downs to get the better of us, it can cause us to trade too often. This can, ultimately, affect the performance of our investment portfolio over the long term.

    Benjamin Graham, one of the godfathers of investing, once said “the investor’s chief problem, and even his worst enemy, is likely to be himself”.

    So, to help avoid pulling the trading trigger a few too many times, let’s take a look at how it could cost you over the long term. It might be more than you bargained for.

    In this article we’ll look at why trading too often could eat into your returns, but it isn’t personalised advice. If you’re not sure what’s right for you and your circumstances, ask for financial advice.

    Know the costs

    The cost of dipping in and out of investments every few weeks or months might not seem like a big deal at the time. What’s a couple of quid here or there you might think? Over time though, these costs can add up.

    Dealing fees – to buy and sell shares you’ll have to pay your broker a dealing fee. That’s on the buy end and the sell end, so the costs will build up. But it’s not just their commission.

    There’ll usually be government taxes or levies to think about as well. When buying UK shares, you’ll normally pay 0.5% Stamp Duty on the value of the trade (excluding any other charges).

    If you’re buying or selling investments that are traded in a foreign currency, there’ll be a Foreign Exchange (FX) charge to convert the currency too. Although this will depend on who you invest with.

    It’s essential to check how much these additional charges could cost you.

    Any fee that’s charged when you trade will reduce the overall amount of your investment portfolio. You also lose any potential return you could’ve earned on that fee if it was invested.

    Portfolio turnover – measures how frequently investments in a fund are traded by the manager. The higher the turnover rate, the higher the fees to reflect the costs of trading. Actively-managed funds tend to have higher turnover rates than passive (index tracker) funds. It’s essential to read the Key Investor Information Document (KIID) before you invest to understand these underlying costs.

    Bid/offer spread – is the difference between an investment’s buy (offer) price and sell (bid) price. Investments that are traded less will often have a larger spread – shares in smaller companies for example. More frequently traded stocks, like FTSE 100 shares, often have a smaller spread.

    Are those who trade the most, hurt the most?

    Buying and selling investments too often can also have indirect costs – like the cost of missing investing opportunities from being out of the market, sometimes called the ‘opportunity’ cost.

    Although it can be tempting to bank profits or to try to take advantage of short-term dips, in reality, being able to time the market is near impossible.

    Like we’ve seen already, trying to predict daily ups and downs can leave you vulnerable to missing out on some of the best days in the market.

    The best days in the market are normally pretty close to the worst days – they both happen when markets are especially unpredictable.

    As Warren Buffett’s previously said, “The Stock Market is designed to transfer money from the Active to the Patient”. So, when it comes to building your wealth through investing, patience is more than a virtue, it’s a necessity.

    Why long-term investing is simple

    Your trading checklist

    1) Your investment goals

    • What’s your motivation for placing a trade?
    • Will it benefit your long-term goal?
    • Is there a gap in your portfolio for this type of investment?

    2) Knowledge of the company or investment

    • Do you understand what the company does and how they make profit (if at all)?
    • If the share price dropped by 5% tomorrow, would that change anything for you?
    • Do you think the company could grow and evolve in the future?

    3) Timing and cost

    • Why now?
    • Is the investment’s price good value for money?
    • How much will dealing charges, stamp duty or FX charges eat into the total trade?

    Look at the bigger picture

    Although trading too frequently can become detrimental to your long-term success, it’s still important to keep up-to-date with how your investments are doing. You’ll need to make sure they’re still aligned to your goals and attitude to risk.

    Portfolios change constantly. Market conditions, company performance and investor sentiment will all play a part in how your portfolio changes over time.

    The amount you allocated to different investments will have changed, as well as how risky your portfolio could be. It’s all about finding the sweet spot between checking your account too much, or too little.

    Rebalancing your investments is an essential tool for maintaining the long-term health of your portfolio. How often you decide to rebalance is up to you, but don’t overdo it – we think once a year is about right.

    Regularly checking in on your investment portfolio and resisting the urge to make a few trades might be tough, but it’s usually worth it over the long term.

    More on how to review your portfolio

    Ready to invest?

    Whether you’re new to investing or with years of stock market experience, hand-picking individual company shares with long-term potential isn’t a walk in the park. It takes countless hours of research to find the stand-out companies of the future.

    We think funds are a great option for simple and effective long-term investing. They’re a collection of investments which are chosen and run by a professional fund manager, so you’ll benefit from their knowledge, expertise and research into thousands of different companies.

    Funds come in all shapes and sizes. Some funds invest purely into shares in both big and small businesses, which are designed for investors willing to accept more risk. Others hold a mix of investment types like shares, bonds, commodities and cash for a more conservative way to invest.

    To help you get started, our investment research team have put together some fund ideas. But they’re not a personal recommendation to buy.

    Investing in funds isn’t right for everyone. You should only invest in funds if you have the time and know-how to diversify your portfolio to help reduce risk.

    Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

    Remember, funds go down as well as up in value, so you could get back less than you invest.

    Investment ideas

    AXA WF Framlington UK

    • Invests in UK companies across a range of sizes.
    • Focuses on high-quality companies.
    • Invests in higher-risk small and medium-sized companies.

    Find out more

    Find out more

    BNY Mellon Real Return

    • A conservative way to invest.
    • Could offer stability to a more adventurous portfolio.
    • Holds a mixture of different investment types.

    Find out more

    Find out more

    AXA WF Framlington UK

    This fund invests in UK companies across a range of sizes. The fund manager looks to pick companies he thinks have lots of potential to grow over the long term – though of course there are no guarantees.

    The fund invests more in higher-risk small and medium-sized companies than some other funds. When building a well-rounded portfolio for long-term growth, think about balancing with funds focused on more established companies.

    The manager's focus on high-quality companies means it could also sit well alongside a fund that invests in companies believed to be overlooked and undervalued. His focus on broader themes and the way they impact individual companies makes it quite different to other funds.

    This is an offshore fund, so investors aren’t normally entitled to compensation through the Financial Services Compensation Scheme.

    More about this fund, including charges and how to deal

    AXA WF Framlington UK Key Investor Information

    BNY Mellon Real Return

    This fund offers a more conservative way to invest compared to a fund that primarily invests in shares. It could be a good option to offer better returns over the long-term compared to cash, without being too exposed to the ups and downs of the stock market. This fund could also be used as part of a more cautious investment portfolio, or bring some stability to a more adventurous portfolio.

    Over the long term the fund aims for moderate growth, while offering some shelter against the worst stock market falls. That doesn’t mean it won’t lose money though, as unlike cash all investments rise and fall in value, so investors could lose money.

    The fund invests in a mixture of investment types that can be broadly split into two categories. This includes long-term growth investments, like global company shares and bonds including higher-risk emerging markets and high-yield bonds. The fund can also use derivatives, which can add risk.

    BNY Mellon Real Return also holds investments that aim to add stability to returns, like gold, government bonds and cash. The team are focused more on not losing money rather than making it, so we don’t expect the fund to race ahead in rising markets.

    More about this fund, including charges and how to deal

    BNY Mellon Real Return Key Investor Information

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Learn more about investing

    Category: LEARN ABOUT INVESTING

    Should I save or invest?

    Category: Investing essentials

    Diversification: what you need to know

    Category: Investing essentials

    Risk: what you need to know

    Category: Investing essentials

    Investing behaviours: what you need to know