Low trading costs: a gateway to supercharging diversification Low trading costs: a gateway to supercharging diversification Low trading costs: a gateway to supercharging diversification

Low trading costs: a gateway to supercharging diversification

Pricing 5 minutes to read
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 take the example of a Dubai/MENA-based buy-and-hold investor with a Saxo Classic account and a USD 10,000 balance. This investor wants 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 0.1% of the amount of each position, or a minimum of USD 10.99. In this case, the minimum fee applies since 0.1% times USD 1,000 would be USD 1, far below the minimum USD 10.99 fee.

If we multiply that minimum USD 10.99 commission times ten positions, our investor would have paid a rounded USD 110 in commission costs or 1.1% of the account value. 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 – in this case the USD 1 minimum applies, since 0.08% x USD 1,000 = USD 0.8. In other words, the trading costs have dropped over 90%, totalling a mere USD 10 or 0.1% of the account value.

Now let’s also say that over an average year this same investor has 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 +1.1% of the account value in commission costs (USD 110 for 5 round trip trades, or 10 x USD 10.99).

Overall, with these assumptions of twenty total trades (see table below), our investor would have spent 2.2% of the account together with the cost of establishing the initial positions, assuming no increase value of the underlying positions. That 2.2% is a very significant chunk, more than 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). Under the new pricing structure, the commissions would add up to only 0.2% of the account, less than 3% of the average 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.

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

If we make further assumptions that this same investor wants to increase the size of five of the 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 55 in commission costs (5 new positions at USD 10.99 each), a 4.4% commission cost relative to the size of the added funds. Under the new costs, the USD 1,250 positions would incur a fee of only USD 1 each, or USD 5 in total, or only 0.4% of the added funds. The smaller the position added, the more the new pricing impacts returns.

The examples above are based on prices available for Saxo’s MENA-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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