Raw transaction costs – Commissions

I’ve been compiling some data for the year-end.

One statistic I track is my transaction costs (i.e. commissions of transactions).

If I’m generating performance that is below the market averages, I should immediately quit and just invest in a bunch of low cost indexes (Canadian Couch Potato is mostly cited in this respect – I will not offer opinion on it, and Vanguard Canada in general is quite low cost). In general, you can invest in a basket of well-diversified stocks and bonds at a management expense ratio of roughly 0.1-0.15% of assets.

It actually isn’t readily obvious whether higher transaction costs is a detriment to performance when one’s performance is higher than the market averages. Can one instead make a case that lowering the volume of transactions will actually increase performance?

The way I try to measure performance is applying the “What if I were to be struck by lightning at any point in time, how would my portfolio fare” test, where if I would arbitrarily freeze things at one point in time – e.g. January 1, 2016, how would I have fared today compared to my present value had I not conducted any transactions since that date? (I don’t answer this question in this post, but consider it for your own portfolios – it is an interesting exercise when you discover that you have two-year streaks where clicking buttons is negative alpha!).

Getting back on topic to transaction costs, over the past decade, this number (as a function of year-ended assets) has been between 0.05% to 0.81% (the 0.81% year was in 2008, which for understandable reasons, was a very volatile year for trading – while losing 9% for the year, I out-performed the S&P 500 by over 25%). The number should decrease over time as asset values have increased.

2017’s year-end number (I do not anticipate making any trades on the last day of the year) is quite close to the low end of my past transaction cost range.

Commissions these days are so low that trading execution is a much more dominant factor in terms of reducing the frictional costs of transactions, but keeping records on raw trading costs I find fascinating. I cannot be accused of over-trading, but always look for methods to optimize how I scale in and out of positions – every basis point of performance counts, especially in today’s non-volatile markets.

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