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FINANCIALLY AESTHETIC · GUIDE 31/37
INVESTING IN PRACTICE: FEES, DCA, LUMP SUM & REBALANCING
FA-6.4 · Investing & Wealth Building
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BEFORE YOU INVEST
Execution details look small until fees, delays and drift compound for years.
Fees: A Cost That Directly Impacts Returns
Investments in financial markets (stocks, bonds, funds, etc.) are not free. Your financial intermediary charges various fees for holding and managing these investments. The impact of these fees on your investment returns is significant. It is therefore important to understand them thoroughly before investing.
One-time cost and Recurring Fees
Investors who buy stocks or bonds directly on their own pay fees with each purchase or sale. These are brokerage fees or execution fees, which are one-time costs. Their financial intermediary also charges them an annual fee based on their holdings. These are recurring fees.
The same applies to investors who prefer to invest through collective investment vehicles (mutual funds and SICAVs): they pay entry or exit fees when they buy or sell their shares, and they pay annual fees - often called management fees - as long as they hold those shares.
Service Fees and Financial Product Fees
Another way to understand these fees is to recognize that they are charged at two levels.
- First, at the level of the legal and tax framework within which these investments are made (life insurance, PEA, etc.). These fees are related to the services provided by the intermediary through whom you invest.
- Second, at the level of the financial instrument itself (such as stocks or mutual fund shares) in which the investor invests.
By providing you with a framework - that is, an account or contract necessary for investing - your financial intermediary is providing you with a service.
The financial instrument (the product) or financial vehicle in which you invest is held within this investment vehicle. In the case of a collective investment fund, this product has its own operating fees, which are in addition to the fees associated with the service provided by the financial intermediary.
For example: if you hold fund shares in a securities account, you may have to pay fees when opening or closing the account (a one-time service fee related to the investment vehicle), as well as recurring fees associated with maintaining this service (account maintenance fees and/or custody fees). In addition, fees related to the investment product will be charged to you: one-time costs for entering or exiting the fund, as well as recurring fees related to the fund’s management (management fees).
The actual impact on a €1,000 investment over 5 years
| One-time costs | Recurring fees |
| Service-related fees | Opening: none | Account maintenance fee: 10 euros per year\<BR>Custody fee: 0.30% of the amount held |
| Product-related fees | Entry fee: 2% of the amount invested\<BR>Exit fee: none | Annual fee: 1.5% of the amount held |
In the first year, the investor pays 50 euros in fees, consisting of 13 euros in service-related fees (account maintenance fee, custody fees) and 37 euros in product-related fees.
In subsequent years, the investor pays the recurring fees annually. After 5 years, the investor sells the shares and recovers 1,090 euros, representing an average net annual return of 1.7%. If no fees had been charged, the value of the 1,000-euro investment, with a gross annual return of 5%, would have reached 1,276 euros.
In summary, a financial institution charges you for providing one or more investment services, and certain financial instruments (or products) themselves incur fees. All of these fees add up and thus reduce the net return on the investment made.
The Special Case of Directly Held Stocks
Investing in listed stocks incurs fees, which vary from one broker to another. Be sure to compare the offerings of different brokers.
- Brokerage fees may be charged when buying and selling stocks. These fees may be flat-rate and/or proportional to the transaction amount and are sometimes subject to a fixed minimum commission.
- An account maintenance fee may be charged for holding a securities account or a PEA.
- Custody fees, which cover the safekeeping of your securities and transactions carried out on your behalf, may also be charged (securities accounts and PEAs). You generally do not pay custody fees when you hold your securities in registered form.
An investor who manages their own stock portfolio directly may benefit from reduced fees if they place orders on major European and U.S. stock exchanges (Paris, New York, Frankfurt, etc.). This is particularly true when placing orders through certain online brokers, which do not charge annual fees (custody fees). On the other hand, when buying and selling stocks listed on less accessible exchanges (Asia, Eastern Europe, Latin America, etc.), investments through funds or SICAVs are generally less expensive.
To invest in stocks through funds and SICAVs, you must have a securities account, a PEA, or a multi-asset life insurance contract.
Of course, as the U.S. SEC points out, as you add investments to your portfolio to diversify it, you will likely incur additional fees and expenses, which in turn will reduce your investment returns. You should therefore take these costs into account when deciding on the best way to diversify your portfolio.
Opening an Account: Brokerage Account, PEA, Life Insurance
To invest in publicly traded stocks, you have two options: direct investment or investment through mutual funds.
- With direct investing, you alone decide which stocks to buy and sell. To do this, you must have sufficient financial knowledge and the time to research listed companies. To invest, you must hold a securities account or a PEA with a financial intermediary (bank, brokerage firm, online broker, etc.).
- With mutual funds and SICAVs, you purchase a share of a diversified portfolio that has already been established and is managed by a professional. To invest in stocks through mutual funds and SICAVs, you must have a securities account, a PEA, or a multi-asset life insurance contract.
To buy and sell stocks, you must place a stock market order, which will be executed by your financial intermediary on the market relevant to your stocks (e.g., Euronext). The most common types of stock market orders are “limit” orders, which allow you to control the purchase or sale price of the stock, and “market” orders, which prioritize the speed of order execution.
Regular Investing Rather Than All at Once
Even when capital is already available
You have several options available. If you do not wish to manage this investment yourself, you can invest your capital in a diversified “turnkey” fund, just as you would with regular investing.
Even if you already have capital to invest, regular investing will help you reduce the volatility of your investment. It’s also a way to avoid the risk of investing all your money just before a significant market decline.
This brings us to the key trade-off in this chapter: investing all your capital at once immediately exposes the entire amount to the market; spreading out your purchases reduces the risk of poor timing, but also means that part of your capital remains temporarily out of the market. The corpus does not turn this trade-off into a universal rule that applies to everyone.
Also, consider regular investing. This allows you to reduce the impact of market fluctuations: purchases at high prices are offset by purchases at low prices.
Investing regularly also helps mitigate risks. Indeed, if you invest all the money you wish to put into stocks at once, you won’t necessarily know whether you’re buying during a bull or bear market. Regular investing reduces the impact of market fluctuations: purchases at high prices are offset by purchases at low prices.
Focus: Buying After a Rise and Selling After a Fall - Behavior to Avoid
As an investor, you tend to let stock market fluctuations influence your decisions to buy or sell. In other words, you assume that recent trends - whether upward or downward - will continue. As a result, you often buy too late and sell too early to take advantage of market rallies.
When prices fluctuate, don’t rush to buy or sell stocks. Before making a decision, focus on the future return potential of your investments and invest consistently. Keep in mind that the value of a stock investment fluctuates constantly and that it is a long-term investment.
In the face of market fluctuations, don’t rush to buy or sell stocks. Always take the time to reflect and assess the future return potential of your investments. In fact, buying stocks after a rise and selling after a drop often reduces your return.
Rebalancing Your Portfolio
Over time, some investments will grow faster than others. This can cause your investments to drift away from your investment goals and alter your portfolio’s risk level. To return your portfolio to its original asset allocation, you may need to rebalance it.
For example, you might start with 60% of your portfolio invested in stocks, but see that proportion rise to 80% due to market gains. To restore your original asset allocation, you may need to sell some of your stocks and/or invest additional funds in other asset classes.
Shifting money out of an asset class when it’s performing well and/or into one that’s underperforming may not be easy. But it can be a wise decision. By reducing your current “winners” and/or adding more of your current “losers,” rebalancing forces you to buy low and sell high.
Some financial experts advise rebalancing at regular intervals, such as every six or twelve months. Others recommend rebalancing when holdings in an asset class increase or decrease by more than a predetermined percentage. In either case, rebalancing tends to work best when done relatively infrequently.
Rebalancing is the process of bringing your portfolio back to your original asset allocation mix. There are essentially three ways to rebalance your portfolio:
1\. You can sell investments from overweight asset classes and use the proceeds to buy investments in the underweight asset classes.
2\. You can buy new investments in the underweighted asset classes.
3\. If you make regular contributions to the portfolio, you can adjust your contributions so that a larger portion goes toward the underweighted assets until your portfolio regains its balance.
Before rebalancing your portfolio, you should consider whether the rebalancing method you choose will trigger transaction fees or tax consequences. Your financial professional or tax advisor can help you identify ways to minimize these potential costs.
You can rebalance your portfolio either on a schedule or based on your investments. Many financial experts recommend that investors rebalance their portfolios at regular intervals, such as every six or twelve months. The advantage of this method is that the schedule serves as a reminder of when you should consider rebalancing.
Others recommend rebalancing only when the relative weight of an asset class increases or decreases by more than a certain percentage that you have identified in advance. The advantage of this method is that your investments themselves tell you when to rebalance. In both cases, rebalancing tends to work best when done relatively infrequently.
In a target-date fund, the fund’s investment advisor is responsible for rebalancing the fund’s asset allocation over time, typically in a way that becomes more conservative as you approach the target date.
Diversification and Best Practices When Executing Trades
Before investing in stocks, keep in mind that this is a risky investment. Since the value of a stock can go up or down, there’s no guarantee you’ll recoup your initial investment. In the short term, the likelihood of incurring a loss is high. Therefore, save for emergency savings and invest only the amounts you are certain you won’t need for several years.
Aim for an investment horizon of at least 5 years. With a diversified portfolio of stocks, you significantly increase your chances of earning a good return if you hold onto it for several years.
Direct investment requires a time commitment: before investing and throughout the time you hold your stocks, you need to stay informed about the company’s operations and its industry. To assess the company’s prospects and the stock’s potential returns, start by reviewing the press releases, annual reports, and prospectuses published by the company.
Don’t invest solely in stocks; diversify your investments. Within your stock portfolio, prioritize stocks from companies in different industries, geographic regions, and so on.
As the saying goes: “Don’t put all your eggs in one basket!” Do not invest all your savings in stocks; also invest in other financial investments based on your goals and the risk level you are willing to accept, and set aside emergency savings. When it comes to your stock savings, diversify your investments: choose stocks from companies in various industries, located in different geographic regions, and so on. Diversifying your investments and stock holdings will help you reduce the risk of capital loss.
INVESTOR CHECK
Pick a repeatable contribution method, understand every fee and rebalance by a written rule.
RISK NOTE
This guide is financial education, not a promise of returns or personalized investment advice. Products, tax treatment and investor protections vary by jurisdiction.
- Investor.gov - How fees and expenses affect a portfolio - United States - fee impact.
- Investor.gov - Is it time to rebalance? - United States - rebalancing.
- Investor.gov - Mutual funds and ETFs - United States - fund structure.
