If Investing Were Free Would You Do Things Differently?

If Investing Were Free, How Would It Change What You Do? by David Merkel, CFA of Aleph Blog

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.

If Investing Were Free Would You Do Things Differently?

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.



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.