Zero Commissions and the Future of Investing
This past week Charles Schwab announced that it would be eliminating commissions for online trades. Later in the week E-Trade and TD Ameritrade followed suit. This is a great development for young people. Now we can diversify and invest small amounts of money without losing large portions of our capital to commissions.
In the past, if you wanted to invest a total of $500 in ten different companies, you would be spending about $50 in commissions, immediately putting you 10% in the hole.
Now these trading platforms have made it easy to diversify and invest. Use this as an opportunity to get invested and begin putting your money to work for you.
A Couple of Examples
Scenario A:
Investment per year: $1000
Rate of return: 8%
Length of Investment: 40 years
These are some reasonable assumptions. If you start investing at twenty-five years old and retire at sixty-five years old, you have a forty year investment period. Eight percent is based on the historical average annual return of major stock indices. One thousand dollars invested a year might seem like a lot, but that works out to a little more than forty dollars a paycheck (1000/24).
At retirement, this one thousand dollars invested per year would be worth $237,332. Forty dollars a paycheck seems like a small price to pay for this future value.
Scenario B:
Investment per year: $1000
Rate of return: 8%
Length of Investment: 45 years
If you can begin investing when you are twenty years old instead of twenty-five, you will magnify the effects of compounding. With all else remaining equal the extra five years will lead to an ending value at retirement of $354,585. You can increase your future value by over a hundred-thousand dollars by starting just five years earlier.
This is not personalized financial advice. It is only to illustrate the magic of compounding. I encourage you to do some research and figure out if you can get responsibly invested. With the recent elimination of commissions, getting started has never been easier.
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