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If Investing Were Free, How Would It Change What You Do?

Sometimes I think people forget that they are people; they think that somehow technology will eliminate their foibles.  ETFs have lowered costs for investors, but the greater ability to trade has enabled investors to more easily be greedy or panic.

Go ahead.  Make trading free.  Lessen further the frictions that inhibit bad trades.

If investing is free, would we create better asset allocation models?  Costs are pretty low now, and I don’t see many imitating GMO, which has the best models of which I know.

Costs are already low now for common trades, and if you are willing to deal with poor customer service, you can trade cheaply in many places using Interactive Brokers. [I like Interactive Brokers.  They are the cheapest, and where they are good, they are very, very good.  Where they are bad, well...]

There is virtue to having some “sand in the gears,” i.e., things that hold us back from making too many adjustments to investments.  If investing is free, then human nature will lack one more roadblock against bad decision-making.

Investors get fixated on explicit costs, and miss the implicit costs, which are often higher.  Honestly, on any investment decision, you want to take time, and ask whether the change is worth it.  Are you really on the right side of the trade?  Just because there is little to no cost to do the trade, does that mean it is correct to trade?

Over the years, with ETFs, I have found that people trade more, and lose in trading.  Jack Bogle was/is right regarding ETF clones of low cost mutual funds.  To the degree that we encourage people to trade because of low transaction costs, the more we enable unintelligent fear and greed.

But As For Me

How would free trading affect what I do?  It wouldn’t.  The cost of trading for me is so low, that it does not figure into what I do.  It is better in investing to think hard about your decisions, and make fewer of them.  Thus I constrain myself to making major portfolio changes four times a year.  It’s a big process, and I do it at mid-quarter.  I think hard about the changes I make, and I make few of them, realizing that I am not immune to fear and greed.

This was written partially with an eye to an article at Abnormal Returns, which I rarely disagree with.  My main point is that human nature is a much bigger factor in investing than costs.  First learn to control human nature, if you can.  Then control costs.

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2 Responses to If Investing Were Free, How Would It Change What You Do?

  1. […] David Merkel: “There is virtue to having some “sand in the gears,” i.e., things that hold us back from making too many adjustments to investments.”  (AlephBlog) […]

  2. […] Controlling costs is secondary to controlling your emotions.  (Aleph Blog) […]


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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