Lowering the costs of investing has an immediate, obvious benefit: it leaves you with more money. But some cost-cutting investment techniques can wind up costing you money in the long run. For instance, participating in dividend reinvestment plans, or DRIPs, is a good idea if you only use it to cut commission costs on stocks you would have bought anyway.
It pays to look beyond dividend reinvestment plans
But confining your investments to stocks that offer dividend reinvestment plans is a terrible idea. Some of these stocks are bad investments. You can lose a lot more on capital losses than you can save on commissions — now especially. That’s why we don’t focus exclusively on DRIPs when we select stocks for our Successful Investor newsletter, though many of the stocks the newsletter recommends do feature them.
[ofie_ad] DRIPs offer much less advantage now than they did in, say, the 1980s, when brokers charged 2% or more to buy stocks. Now, thanks to the growth of discount brokerage and Internet competition, you can buy stocks for a commission cost of 0.5% or less. In addition, many companies that offer DRIPs have done away with the 5% discounts that used to be common. Now you pay full price to buy through most DRIPs.
Focusing too narrowly on price can hurt your long-term returns
Another cost-cutting tool that can cost you money is to routinely refuse to pay the market price for stocks when you buy. Some investors always put a bid in below the offer price, in hopes of buying at a slightly better price. However, some of your investments are going to go up as soon as you buy, and keep going up. Others will go down.
If you always put in a bid below the current market price when you buy, you’ll filter out all your best ideas. You’ll save a few cents from time to time. But you’ll always buy all your bad investment choices, and none of your best ones. When you subscribe to The Successful Investor today, you get one month absolutely free. You have no risk and no obligation. Click here to learn more.
