Impact of fees on stock purchases

When picking a bank for your stock account one of the most important aspects that you should pay attention to is the amount of fees that you have to pay when purchasing or selling stock. Estonian banks have different payment schemes for fees but in the end the majority of clients such as myself end up making LHV the home of their portfolio.

The reason for this is simple – LHV doesn’t have a monthly fee for “management” of your stock account. In most Estonian banks the fee is something like 0,8-2€, in some it goes up to almost 4€. This means an additional 12-60 euros that you have to earn yearly just to be even with the fees! Especially with a small portfolio this is highly unlikely to happen.

Fee model for puchases

The purchasing fees for LHV are quite straightforward. The cost of a deal is 3€+0,2% of the deal price. The flat fee means that the bigger your purchase the less you pay per 1€ spent.

For the LHV formula the cost per 1€ ends up looking like this:

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You can see a lovely downwards curve that starts getting closer and closer to 0,2 cents per 1€ while never quite reaching it. This is why it’s important to think about how much stock you purchase at once. If you were to make a purchase that’s 250€, then the fee per 1€ would be 3 times higher than if you were to purchase 1000€ worth of stock.

To avoid fees making too big of an impact on your returns it’s reasonable to aim your purchases close to 750-1000€ because at that point the impact of the fees starts curving lower and lower. Of course it would be ideal to make purchases in the range of 10000€ to minimize the importance of fees but as a small scale investor it’s going to take a while to get to that point.

This also illustrates quite well why as a small scale investor you won’t be making much money quickly buying/selling stocks hoping to make money off that – the fees will just eat out any potential profits very quickly. For a dividend portfolio luckily fees are likely to be a one time thing since you’re buying to hold – and hopefully to never really sell. Any rebalancing should happen by buying into other stocks, which you would do periodically anyways.

1€ in the hand is worth how much in the future?

Something that is very important about any kind of investing mindset is the understanding of perspective. Essentially this means understanding the time value of money – money that you spend or choose to not spend at this moment – what could potentially happen to it in the future?

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The time value of money

The time value of money is an essential concept that gets drilled into the head of pretty much every financial manager out there. I had a 5EAP subject at TTU this semester which basically boiled down to this same idea as well. To save you the trouble of having to spend time with my mildly sexist professor – in the event of other things being equal it’s always better to have the money now.

Money loses value as time goes on. This was painfully obvious during the financial crisis – inflation ate away at the value of money so if you had 1000€ at the beginning of the year, then by the end of the year it was more likely to be worth closer to 900€ than the original 1000€ in terms of purchasing power.

This very idea is the basis for pretty much all investment advice which tells you that the best time to invest was 20 years ago and the second best time is now. The younger you invest, and the more, the more likely you are to end up making huge returns. The stock market’s historical returns are around 8%, which means that every year that you delay your investing you have to invest roughly 8% more to get to the same results. As time goes on, that 8% keeps increasing as compounding interest starts working against you.

So much is your 1€ worth?

Quite often people spend money on tiny purchases without thinking much – it’s just 1€. The problem is that if you add up an euro here and there, then it ends up in hundreds and as years go by that compounds into thousands.

Just to give you a visual of what this works out to. I’m currently 25 so I’m likely to retire at about an age of 75 looking at the current trends in retirement ages – this means that I have 50 years to gather up money. (Or less if I want to retire early.)

This is what is likely to happen to any single euro that I invest at this point with a pessimistic return of 5% and a more likely historical 8% of the stock market. Looks impressive, doesn’t it? At a 5% return it climbs to 11€ in value, at an 8% return it climbs to 43,5€ in value. (Leaving out inflation and changes in money value, let’s think in today’s money.)

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How much should you worry about that 1€?

MrMoneyMustache I think was the one who has a great philosophy about the impact of saving on your future. Essentially, it isn’t so much about short term savings and keeping yourself from spending that x amount (though that is important too). It’s about adjusting your standard of living to spend less recklessly – every euro that you save WHILE keeping that euro off your everyday life expenses actually ends up saving you the original 1€ that you’ve not spent and also saves you from having to save so much for retirement – because you don’t need that much money.

Seeing as the logic of most retirement portfolios is that if you want to spend x amount of money per year, then you have to save 25 times that. For example, a 1000€ per month vs 950€ per month in planned expenses means that you have to save 15 000€ euros less for your portfolio.

This doesn’t mean that you have to go mad with saving money (some do) and sacrifice your free time, health or enjoyment of life to save that money. There are however several very reasonable things that you should be doing that will help you free up those very important euros for investments. Like a lot of other financial tips, these things compound on each other as time passes.

Important steps to keep expenses down

1. Spend reasonably on the big things. (It’s silly to fuss about the lattes if you’re overpaying on your car or rent)

2. Buy high quality items. (This might mean higher initial costs – but you can afford that – it will mean lower overall expenses)

3. Spend on things that matter. (I’m sure just looking around your room you can find things that you wish you hadn’t bought – I can!)

4. Put in some effort to find good deals. (This means rewards programs, sales etc. A bit of effort can have high returns)

5. Take good care of your things. (Things like your home, your car, all sorts of tech lasts a lot longer with proper maintenance)

What’s your great habit to keep expenses down?

Early retirement – what to do about health care?

In addition to the big piles of money you have to stack up to be able to retire early, hands down the biggest issue is health care. You can’t just not live without healthcare but there are certain issues with keeping your access to health care services.

In many American blogs I see that they have the option to buy health insurance from many different insurance providers even when not working due to the way their health care system works. Estonia, however, like many other European countries has a universal coverage system where the state takes care of you as long as you’re a productive member of society – this is where the problem arises with early retirement – you’re not really technically a productive member of society anymore.

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Conditions to be eligible for health insurance

Essentially in Estonia eligibility for healthcare is linked to whether or not social tax is being paid for you. There are two options for social tax being paid – it can be paid by your employer OR by the state.

The state pays your social tax if you’re unemployed and actively seeking a job (so not an option for early retirement), if you’re a university student (impractical to aim for that) and under a few other conditions that you’re unlikely to hit as a potential early retiree (like raising 7 kids).

Your employer pays your social tax if you’re working for them – not something you’re likely to keep doing as an early retiree. Social is 33% of your gross salary which is being paid by your employer. (13% for healthcare + 20% for retirement). There’s a minimum to be eligible for healthcare, so you can’t just work 1 hour a month and keep your rights to be insured.

How to be insured if you aren’t working?

While it’s possible to keep working part time and most people would (including me) because they want to be useful and they enjoy their work a moment should be taken to consider the option of not working or at least taking a temporary break when you’ve hit your retirement goals.

There are actually two options here. Firstly, you can become your own employer. This means incorporating some of your investments so that you’d have an LLC that you can use to pay your own salary. You could just pay yourself the minimum and take the rest our in dividends. (Depends on how interested you are in Estonian retirement schemes since they depend on your salary). This would likely bring several tax benefits as well because you can discount losses more easily as an LLC as opposed to an individual.

However, if you’re opposed to that idea, I was surprised to find that’s relatively easy to get optional insurance as well. For the year 2014 monthly cost for optional insurance was 123€ (it’s calculated off the average gross salary*0,13). You are eligible for the insurance contract if you’re a permanent resident in Estonia and have been insured by some other party (state or employer) for 12 months in the previous two years. I assume that condition is there to stop people from just migrating into the country to get health insurance.

In the long run the payment will probably go up as the average salary climbs up as well, but that is going to happen with your potential salary as well since that’s going to increase as well. I’d say it’s probably more reasonable to have an LLC and pay yourself a salary to get health insurance since at that point you’re likely to have enough investments that you should start thinking of tax advantages, but it’s good to know that you can get health insurance without much hassle if you decide to take a year off work for example to travel the world!

My social lending portfolio (2014, 2nd Q)

Time flies quickly and another quarter has passed. Overall there have been a lot of changes at Bondora and they’ve influenced my portfolio quite a bit. Firstly, the queue system has been changed which means that it’s a lot harder to get into A1000 Estonian loans (best credit grade). There has also been increased market pushes for Spain and Finland, which means that to get all your money out, you must either forcefully diversify or accept bigger risk through bigger loan parts.

Q2 pieOverall I’ve finally climbed to almost 3000€ in active principal which is pretty cool. Also, as of this morning I’ve put 2500€ into the site – I’m doing pretty good for my 2014 financial goal. The problem currently being the lack of loans – and I don’t want to just push all money into B+ (unverified) loans since I think it’s a bit too risky at this point.

I’ve added some B+ loans though – only Estonian ones that are verified through other documents. I’ve also made a small bidder for Spanish loans to slowly enter that market. I’m willing to invest about 25% of my monthly money to B+ loans and about 10% into Spanish A1000 loans. I’ll have to see how that works out.

Q2 returnsAs you can see the returns graph is still looking like a lovely flat line and unless something drastically changes I don’t really see this graph becoming any more useful in the future. I suppose I should be worried once it starts dropping for some reason.

Q2 total investmentsI tried to aggressively push money into loans but due to the slow queue it really isn’t moving much. I constantly have at least 100€ just sitting on my account waiting to be invested. This even with increasing some loan pieces to 25€ and adding in a small bidder for Spanish loans.

New loans issued:

During the 2nd Q I added 66 new loans –

7 of those are Spanish, others are Estonian

25 loans are A1000 EST

5 loans are B1000 EST

4 loans are C1000 EST

12 loans are 800-900 credit group EST

13 loans are 600-700 credit group EST

As you can see it’s quite easy to get into 600-900 loans, I constantly have to limit the bidder since I don’t want to overexpose myself to low credit groups while not getting into high credit group loans, but it’s proving to be quite difficult. Taking into account that some of those are B+ loans the risk level might be even higher than the numbers predict.

60+ loans

In the three past months 10 new 60+ loans have been added (to a total of 22 loans in the red). Luckily some have made repayments as well (as small as those are), and two have fully paid back the principal owed. I’m expecting a pretty big bump in overdue loans because if you look at the graph right now I’m feeling the effects of the winter months where I didn’t invest that much money.

New auto bidder system

I remade all my bidders when the queue system was revamped to have bigger control over diversification and really, it’s hard to push the money out. You can take a look below to see what I’ve managed to give out – the low credit ones fill up with a day if I increase the limits. I’m still playing around with it to see how to balance my portfolio the best.

I hope summer will bring bigger loan volumes since I’m likely to have more available money. But as it stands I’m likely to make another stock purchase soon instead.

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