Why Trading Costs Matter

Stock trading by fund managers can weigh on a fund's performance -- or it could give it a boost. Understanding the basics of trading costs can make you a better fund investor.

Domestic stock funds spend an average of 1.44% annually on buying and selling stocks -- more than they charge in annual expenses, according to a new study. But the results of this rigorous study are much more fascinating than that one number indicates. The study found that how much a fund's trading actually costs investors varies dramatically depending on what kind of fund it is -- and why the fund managers buy and sell stocks.

Despite the costs, a lot of trading ends up boosting performance. When a manager buys or sells a stock because he or she thinks the price is right, on average, the trades add value to the fund even after subtracting all the trade-related costs.

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Steven Goldberg
Contributing Columnist, Kiplinger.com
Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.