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Low trading costs: a gateway to supercharging diversification

Pricing 5 minutes to read
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  This article makes clear that Saxo’s lowering of trading costs can provide a gateway to inexpensively diversifying your portfolio. Adding diversity to a portfolio has long proven a way to lower risk and improve the likelihood of positive portfolio growth over long time horizons. With lower trading costs, even investors who are just starting out can create diverse portfolios of multiple stocks and add to and change these positions with minimal impact on returns.


The need to diversify investment portfolios is a long-established principle for investors to follow. A paper on portfolio diversification written back in the 1950’s by budding economist Harry Markowitz, in fact, was awarded a Nobel Prize in 1990. As Markowitz said in interviews on the subject “I was awarded [the prize] for portfolio theory, which in brief says: don’t put all of your eggs in one basket.” While diversification can never fully eliminate risk, it is important for any investor building a portfolio over a lifetime not to be overexposed to the risk of any single stock or sector. 

Especially for the investor just starting out on an investment journey, building a portfolio can seem a daunting task, and trading costs are a critical consideration before making any investment. That’s particularly the case for smaller position sizes, where trading costs risk representing a large percentage of the likely return on a portfolio. And inevitably, as investment position sizes fall, fixed trading costs can severely downgrade portfolio returns.

New, lower Saxo trading costs are a gateway to supercharging portfolio diversification.

Just as active traders and investors will benefit from Saxo’s lower trading costs for more frequent trading strategies, so too will buy-and-hold investors. To illustrate the impact of Saxo’s lower costs, let’s imagine that we have two buy-and-hold investors (with a Saxo Classic account), one in Denmark and the other in Prague/CEE. Our Danish investor has a DKK 65,000 (about USD 10,000) account and our Prague/CEE investor has opened a USD 10,000 account as well. 

Our two investors want to invest in ten US stocks with approximately equally sized positions of USD 1,000 each. Using old prices, the cost per trade would have been:

  • For the Danish investor: 0.1% of the amount of each position, or a minimum of USD 9. In this case, the minimum fee would have applied since 0.1% times USD 1,000 is USD 1, far below the minimum USD 9 fee.

  • For the Prague/CEE investor: 0.1% of the amount of each position, or a minimum of USD 5. In this case, the minimum fee would have applied since 0.1% times USD 1,000 is USD 1, far below the minimum USD 5 fee.

 

If we multiply those commission costs times ten new positions, our Danish investor would have paid USD 90 in commission costs or 0.9% of the account value and the Prague/CEE investor would have paid USD 50, or 0.5% of the account. But under the new commission structure, each position would incur a cost of 0.08% x the USD 1,000 position size or 1 USD minimum for both investors. In this case the USD 1 minimum applies, since 0.08% x USD 1,000 = only USD 0.8. In other words, the trading costs total only USD 10 for the ten positions, a drop of some 88.9% for our Danish investor, and a drop of 80% for our Prague/CEE investor.

Now let’s also say that over an average year our two investors have a 50% turnover rate in positions (5 positions sold and a new 5 positions acquired). Under the old cost structure that would have meant an additional USD 90 of costs for the Danish investor and USD 50 for the Prague/CEE investor. 

Overall, with these assumptions of twenty total trades (see table below), our Danish investor would have spent 1.8% of the original USD 10,000 account on trading costs. That is a very significant chunk, nearly a quarter, in fact, of the average yearly return on the S&P 500 Index over the last 20 years of 7.5% (not including returns associated with dividends). Our Prague/CEE investor would have spent less, but the 1.0% of the account in total commissions for the twenty total trades is still a sizeable percentage of average returns. 

But under the new pricing structure, the commissions for twenty trades would add up to only 0.2% of the account, a tiny 2.7% of the average annual return of the S&P 500.

Note: all examples in this article and in the table below only include trading costs and no currency conversion costs.

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Saving even more (in percent) with regular position “top-ups”

If we make further assumptions that our investors want to increase the size of five of their existing investment positions by USD 250 each during the year, the old commissions associated with this USD 1,250 increase to the account size would have incurred another USD 45 in commission costs (5 new positions at USD 9 each) for the Danish investor and USD 25 (5 x USD 5) for the Prague/CEE investor. For such modest position sizes that would have been a chunky 3.6% / 2.0% in commission costs relative to the size of the added funds for the two investors, respectively.

But under the new costs, the five USD 250 positions would incur a fee of only USD 1 each, or USD 5 in total, a mere 0.4% of the added funds for both investors. The smaller the position added, the more the new pricing impacts returns. And when we consider the effects of compounding the lower costs over time, the boost to returns is even more remarkable.

The examples above are based on prices available for Saxo’s Danish and CEE-based clients. The old trading costs before pricing changes may vary in other jurisdictions. Saxo clients trade according to classic, platinum or VIP pricing structures.

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