Submitted by Steve Selengut
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Commissions are no Big Deal... Period - Part 4
The Commission Virus attacks the cerebral cortex and creates mathematical dementia, an almost true story!
- After a year of trading, the Investment Manager proudly presented the Capital Gains report which showed an 11% gain on trades equaling approximately $11,000, with an average six-month holding period.
- The client fired the manager because his RIA Accountant calculated that the real gain was only $5,800 because he had paid $4,200 in commissions and $1,000 in management fees.
- How so cried the manager, these profits are after commissions. You are deducting them twice! You'll be paying taxes on the $11,000.
- Oh, you are right! My real gain is only $2,500!
- But your account value reads $113,000! (Tell me how for a free book!)
- Don't confuse me with the facts.
- Beware the DICV (Dysfunctional Investment Commission Virus). It's out there!
The Day Limit Order Saves the Really Big Bucks... regardless of how you pay the commissions. You may get some resistance, (or be resistant yourself) to using this type of order, but try it for a while and be prepared for some enlightenment, so long as you are using a brokerage firm that guarantees its Best Execution efforts. You will observe:
- Buy executions at varying prices below the limit you've specified. If you are watching the proper market statistics and numbers, and are asking for complete real time quotes (bid, asked, last), you'll be able to dig deeper below your original buy price for savings far better than the simple discount commission.
- Sell executions above your limit... sometimes by significant amounts.
- Absolutely no unfortunate surprises.
Downside and emergency benefits of the Flat Fee Commission Arrangement:
- If an issue you hold is downgraded, a realized loss may be changed to a small realized gain if no commission is to be paid.
- In a down trending market, a small profit or breakeven transaction my produce the cash needed to shop for bargains.
- In an emergency, the pain of unplanned selling can be eased.
Possible Tax Benefits of the Flat Fee Commission Arrangement... maybe (subject to your accountant's advice on the subject):
- A way of removing assets from a retirement program without ever paying any taxes on the money withdrawn. This goes for Investment Management Fees as well. However, the withdrawals must be for charges that are actually associated with services for the account in question.
Click for Details --> Commissions - Part 1 <--
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