“Free” Trades Can Cost a Lot
I love free or low-cost service as much as the next guy. When my Ford Explorer needs an oil change, I’m all about taking it to my local mechanic, who I’ve been going to for years, rather than the Ford dealer. He’s about half the price for the same oil and fluid level checks.
Likewise, if you’ve read my blog for very long, you know I am a consistent champion of eliminating unnecessary costs from your investment experience.
But it’s also important to note that not everything that comes cheap is necessarily such a great value. As an example, your can read this interesting MarketWatch article about a new app that offers users free ($0) trades: “The trouble with Robinhood’s no-commission trading app.”
The author rightfully points out how the app can cost you plenty in the long run. If you use it to feed an unhealthy addiction to playing the market like it’s a Las Vegas craps table, instead of harnessing capital growth to build patient, long-term wealth, you’re likely to end up the poorer for it.
In short, with or without trading costs, many do-it-yourself investors tend to do it TO themselves, wiping away any value to be gained from “free.” As this article points out, “Famed trader Jesse Livermore emphasized the importance of not buying and selling stocks too much. … ‘It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!’”
I would make similar observations about the rapid emergence of all the free or budget-minded online investment advisors entering the scene these days. Don’t get me wrong. Given my engineering degree and past career at Dell, innovations that promise to reduce unnecessary costs, streamline complex processes, and provide increased transparency to end investors make me go all soft in the knees. I love where the financial industry is headed here.
But that doesn’t mean I think you, as an investor, should have to head there all by yourself. As a tech-savvy financial professional and a former Morningstar analyst (yes, I actually get a big charge out of diving deep into the mechanics and coding of nearly every new mousetrap), I’m excited about assessing the possibilities of these new tech tools. My experience and role remains as relevant as ever, if shifted slightly to: (a) warning investors away from “free” tools when they are likely to be costly in the end, and (b) helping clients apply the best ones – wisely – in the context of their greater goals.
