Excessive stock trading erodes long-term gains!

We all know that investing in the stock market is one of the smartest ways of growing one’s wealth. What is less well understood is how excessive stock trading can seriously damage the overall returns of an investment portfolio.

Recent research from the personal finance website finder.com, examines the hugely different fee structures that exist across many trading platforms. It also highlights how, over time, regular trading can lead to racking up enormous fees, which inhibits long-term wealth generation. Let’s take a closer look at some of the stats.

A typical investor

An average investor makes 38 trades per year, buying or selling an average of £1,762 worth of stock on each trade. This sounds like a large sum of money. However, most of this money is recycled. Such trading doesn’t sound overly excessive.

A problem emerges when one considers the stocks most actively traded on UK trading platforms. These include the likes of Apple and Tesla. Consequently additional fees need to be factored in. Their research highlights that consistent trading in US stocks could cost up to £32.67 extra per trade, depending on which platform is used. That equates to a yearly trading fee of £1,241!

That is not the end of the story. Depending on which UK broker an investor chooses, fees for trading US stocks can vary wildly. Over the course of a decade, the difference in fees between the most expensive and cheapest is over £12,000!

If it is possible to paint a more terrifying picture, then consider the position for a young investor who trades a similar pattern for the next 40 years. They would end up paying an average of £25,660 in fees. Indeed, for one platform, the fees add up to over £50k!

Moral of the story

One clear takeaway to emerge from this research, is how, over a lifetime of trading, fees can really stack up. And often without one noticing.

The obvious way that an investor can prevent excessive fees derailing their investment returns, is by taking a long-term approach to investing. Indeed, that is what we advocate here at The Motley Fool.

Warren Buffett, arguably the greatest investor of all time, has a very simple strategy. His default holding period is forever. He is not alone. Terry Smith, the fund manager of Fundsmith Equity summed up his investment strategy as: “Buy good companies, don’t overpay, and do nothing”.

Applying such a simple strategy sounds easy but is rarely executed well by most investors. But over long time frames, history shows that the stock market is weighted in an investor’s favour. As Benjamin Graham liked to say, in the short run the market is a voting machine, but in the long run it is a weighing machine.

Here, at The Motley Fool, we advocate one of the fundamental concepts of investing, namely ‘staying the course’.

When opportunities to invest in quality companies arise, smart investors seize them. They know that time is the friend of the wonderful investment. By holding shares through multiple business cycles, as well as compounding any dividends, an investor both minimises fees and is more likely to turbocharge their overall returns.