Free Trading Goes Mainstream!


Sorry it has been a while since I last posted. Things have gotten very busy lately (all good stuff) and then we went on an epic road trip. The header picture for this post is of Mesa Arch in Canyonlands National Park.

Charles Schwab and TD Ameritrade announced that they will no longer charge commissions on most trades. I first heard this idea in the late 90's when Schwab rolled out internet trading for $29.95. It was widely believed that at some point commissions would go to zero and although Robin Hood started this a while ago, Schwab and TD are obviously much bigger. Brokerage stocks got crushed on the news but with a little help from Barry Ritholtz, this is far from a death blow. Commissions account for only 7% of Schwab's revenue for example but it is a bigger deal for TD to do this.

Zero commission is net net a positive of course but at well under $10 for years, commissions stopped being an obstacle. As I have read in a couple of different places, if your strategy will benefit greatly by no longer paying five bucks for a trade, you probably have the wrong strategy. To be clear, I am not crapping on this, it is a great gesture but the right changes to make because of this development is no changes. Whatever your strategy is, it should not change solely because a small hurdle has been removed.

I am not a fan of doing a lot of trading and this chart shows why;

The blue line isn't even a stock, it's a non-tech sector. I've held it for clients longer than ten years. You can clearly see periods where it lagged but those lags haven't really mattered in the context of ten years. If you build a diversified portfolio with narrower holdings (sector, industry, niche, individual issues) then you will have some that look like this and some that have underperformed but I would argue that holding long term is how success is had in the stock market. Of course not everything can be held long term for various reasons but long term is my objective. When you get something wrong, sell it. When the story changes in a way that could be permanently negative, sell it. And every so often, something might grow to be too large relative to the portfolio. If you bought a stock with a 3% target weight and it grows to 10% of the portfolio, then you might want to trim which is about risk management not actively trading.

I don't think free commissions will become an incentive to trade more for most folks but who can say and certainly some people will make bad decisions around this. Don't be one of them.

As an add-in, this morning's SA for FA podcast painted a grim picture of the retirement prospects for Generation X, this is my cohort, I am an older Gen-Xer. Knowing what to do is easy, live below your means, save money, take care of yourself. Actually doing it may not be so simple.

It certainly is simpler if you started doing what you needed to do at a young age. As we've explored many times before, even starting at 50 (remember we're talking about Gen-X) is not too late on all fronts, saving, scaling down expenses and getting healthier. People do need to be their own catalysts to make changes. You know whether or not you're under-saved, you know whether or not you're as healthy as you could be and on and on with any other areas are relevant to your circumstance.

The podcast also asks what advisors can do to help their Gen-X clients get to where they need to be. Potentially harsh comment coming; but I believe an advisor should be walking the walk and set an example by generally doing the things they tell clients to do. This is true in my life for fire chiefing as well.

One more picture from the trip, the Colorado National Monument;