Free Is Not Better Than Not Being Stupid

Free is great but it's not the most important thing.

There was a buzz created on Tuesday when JP Morgan announced a free trading platform while Vanguard made news with free ETF trading. This on the heels of a couple of Fidelity funds going to zero fee all as an ongoing trend for cheaper everything related to investing, a trend that started in the 1990's perhaps with Charles Schwab's Telebroker service.

Both Mark Hulbert and Josh Brown weighed in with related and relevant posts that strike a tone similar to what I've been saying here for many years.

Hulbert focuses on two points. He notes that the popularity of indexing could end badly for investors if they throw in the towel at the wrong point in the next bear market. He is not citing flaws in indexing, he is citing flaws in human behavior. The other point he makes, which he says is a big change in his thinking, is that advisors' investment performance may not actually be that important compared to simply preventing clients from succumbing to their emotions. Jack Bogle and Charlie Munger have both been quoted about the importance of not doing stupid things in relation to having long term investing success.

Brown takes a different path to making a very similar point. He says that free or cheaper products and services don't mean much when people succumb to self-destructive investing behaviors. This makes sense, what good is a portfolio that was free to implement and costs four basis points to maintain if you panic sell after a 30% decline only to then watch the market go up without you?

The way I try to address the related topic of avoiding short termism is to ask something like without looking, how did you do in the 3rd quarter of 2015 and was that better or worse than the market? Of course no one knows because it doesn't matter. What matters are things like having enough when you need it or at least being reasonably close and then not running out of money. If the US stock market averages 7%-10% annualized (depending on the period studied) and you are somewhere close to that number while having maintained an adequate savings rate then you should end up pretty close to where you need to be...provided you don't succumb to emotions. That might be easier said than done but it is that simple; save money and don't panic.

Josh quotes Nick Murray talking about performance having made no difference if you're 76 or 82 and out of money. It doesn't matter how you got there, you're out of money. The way I have phrased this same point is to say that being 85, healthy and out of money is a bad situation to be in.

Josh also seems to be making the case for having an advisor which I am not going to disagree with but I have always conceded that creating a financial plan and navigating through most if not all of life is something that can be learned but someone not wanting to hire an advisor needs to put in a lot of time even if they go with a two or three fund portfolio.

There are issues related to understanding how the various tax deferred accounts work, how to manage withdrawals, making informed decisions about Social Security, making informed decisions about Medicare, understanding RMDs and so on. Again, learnable for someone committed to spending the time needed but the cost of getting this stuff wrong is too high to not take it seriously or hire someone to do it for you.

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