What's All This Free Trade Talk?
Yesterday two very large financial institutions announced they would no longer charge "commissions" on any online exchange-listed stock, ETF (domestic and Canadian), and options trades for any investor on their platforms.
The cost associated with investing has been plummeting for years. First it was the robo-advisor firms pushing down costs for asset management. And lately, another financial startup became one of the first investment firms to charge $0 for trades. Now it appears everyone is getting in the game.
I'm a big fan of this trend. Investing costs is one of the core financial factors we can control. So seeing costs trending south means more of your investment money stays in your account. Your net rate of return increases by whatever costs you're able to save or not pay.
Couple this with the fact every person with internet access has more information available to them than at any point in history. You can literally find information on pretty much any company, any fund, any stock. You can also find a multitude of opinions on this information, too. And on top of that, this information is cheaper than it's ever been - if not entirely free.
Can “Free” Be a Bad Thing?
I think it can. While I love love love the idea of $0 trades/$0 commissions, I worry about the impact this could have on your ability to trade freely. Before yesterday, TD Ameritrade (one of the institutions that announced $0 trade fees) charged an investor $6.95 per trade. This doesn't seem like much, right? But if your portfolio contains 10 different ETFs or stocks and you want to fully rebalance your account each year then it will cost you $69.50.
Rebalancing is an important part of any investment plan. Over time, some funds might increase in value while others might go down in value. The end result? You might end up with more stocks than bonds, or more bonds vs. stocks than you want - this is pretty common in a diversified portfolio. So rebalancing helps keep your stock to bond mix aka asset allocation consistent and now we can rebalance and/or reinvest with $0 cost to you*, the investor. Oh, and rebalancing can also help improve both your overall performance AND behavior.
Ahh, behavior. Another core financial factor we can all control. Let's go back to that $6.95/trade fee. Again, it doesn't seem like much, right? But it's just pesky enough. I mean, who wants to pay $70 if they don't have to. Not me! Since investing is a long term endeavor, that trading fee can act as a deterrent and help keep you in your investments. On the other hand, the $0 trading fee frees us up to be more careless in our predictions, speculations, and guesses around investments. There's no immediate financial impact to our decisions now! Don't like how the ABC Global Fund has performed? Fine. You could do some research - remember, it's easily accessible and cheap - find a new, shiny 5 star fund and pick that one…free of charge.
NOTE: if you've been following along I do not advise this type of investing. Don't predict. Behave and ride the waves!
Look, I'm not saying the trading charge will keep you in your investments nor should it necessarily. But I think it can be just enough of a deterrent to doing something stupid. Like bailing on an investment in favor of a newer, shinier investment that may/may not do better than the investment(s) we already own. It can also be the catalyst to keep us in our investments long term.
In light of this news, here's a few reminders for all of us:
a low cost, diversified investment portfolio still offers the best chance to reach the goals you set
time "in the market" will consistently outperform "market timing"
trying to pick the next Amazon or hot fund is fool's gold
be disciplined and behave around your investments
I do believe the move to $0 is a gigantic win for disciplined investors and advisors alike. And I do worry about the impact it could have on investors' ability to move in and out of investments freely, which could negate the positive effects of a long term investment strategy.
Be happy that costs are going down and remain an investor. Don't use this as an excuse to become a speculator.
*fund expense ratios and advisory fees still apply