Low trading costs: a gateway to supercharging diversification

The need to diversify investment portfolios is a long-established principle for investors to follow. A paper on portfolio diversification written in the 1950’s by 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 to avoid overexposure to any individual stock or sector. 

Especially for the investor just starting out on their investment journey, building a portfolio can seem a daunting task, and trading costs are a critical consideration. That’s particularly the case for smaller position sizes, where trading costs may represent a large percentage of the likely return on a portfolio – and 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 a buy-and-hold investor in Australia with a Saxo Classic account containing USD 10,000 (about AUD 15,000). This investor wants to invest in 10 US stocks with equally-sized positions of USD 1,000 each. Using Saxo’s old prices, the cost per trade would have been 0.08% of the amount of each position, or a minimum of USD 8. In this case, the minimum fee applies since 0.08% times USD 1,000 would be USD 0.80, far below the minimum USD 8 fee. 

If we multiply that minimum USD 8 commission times 10 positions, our investor would have paid USD 80 in commission costs, or 0.8% 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 USD 1 minimum – in this case the USD 1 minimum applies. In other words, the trading costs have dropped 87.5%, totalling a mere USD 10 or 0.1% of the account value.

Let’s also say that, over an average year, this same investor has a 50% turnover rate in positions (five positions sold and five new positions acquired). Under the old cost structure, that would have meant an additional 0.8% of the account value in commission costs (USD 80 for five round trip trades, or 10 x USD 8).

Overall, with these assumptions of 20 total trades (see table below), our investor would have spent 1.6% of the account value. That 1.6% is a very significant chunk - over a fifth, in fact - of the average yearly S&P 500 Index return 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 do not include currency conversion costs.