What caught my eye this week.

A nice coincidence saw Joe Wiggins at the Behavioural Investment blog write about the downsides of friction-free investing in the same week that Freetrade was acquired by IG Group.

IG does offer share trading, but it’s still known primarily as a spreadbetting firm.

And while I’d argue Freetrade – in which I was a tiny early investor – provides a less gamified trading environment than, say, Robin Hood in its pomp, many investors will still overtrade when there’s no explicit cost for doing so.

Wiggins writes:

The issue for investors is that technological developments have made many things easy – checking portfolios and trading – but without careful consideration of the negative behavioural implications.

Investors have ended up in a situation where we are overwhelmed by emotional stimulus and have no friction to stop ourselves reacting to it.

It is as if the industry has said – “humans are prone to costly behavioural mistakes, so let’s make them as easy as possible to make”.

Wiggins says it’s both the best of times and the worst of times to be an investor.

We all have easy access to the tools we need nowadays to invest to meet our long-term goals.

You can buy and hold a basket of thousands of the world’s best companies for peanuts. Choose the right cheap platform and it’ll cost you very little to let it compound for decades.

However we still have the biggest hurdle to get over – ourselves!

Free love

It’s not yet clear what the consequences of zero-fee trading will be for investors as a whole.

It’s still a safe bet that a majority of DIY stockpickers will be taken out to the woodshed and shot – or less sensationally that they’ll lose to the market – and that they’d be better off in index funds.

Decades of data shows that’s true for most people.

However research published in 2023 by the University of California found the cost savings from zero trading fees do appear to boost returns:

The trading platform eToro’s staggered removal of trading fees in different countries allowed the researchers to compare investors’ behavior before and after fees were gone.

[Lead researcher] Even-Tov and his co-authors looked at these patterns for over 40,000 investors between October 2018 and November 2019.

The research design proved particularly powerful as it cut across three different dimensions of trading behavior.

• First, the researchers could look at how individuals changed their own behavior (if at all) when trading fees were removed.
• Second, they could compare trading behavior between individuals in countries with and without fees.
• And third, they could compare how individuals traded stocks that had no commission (non-leveraged trades) as opposed to those that continued to have a commission (leveraged and short sale trades).

Even-Tov and his colleagues found, first and most intuitively, that the removal of fees increased trading frequency by an average of about 30%.

Having no fees also drew more people to the eToro platform: New users grew by 172% in countries without fees and only 18% in countries where fees remained in place.

Interestingly, the removal of fees also led people to hold significantly more diverse portfolios.

Most important, taking away fees improved net performance among traders.

Of course, ‘improved net performance’ still doesn’t mean most people should go stock-picking – or churning a portfolio of index-tracking ETFs based on what Donald Trump last muttered, come to that.

If you lose to the market by a bit less because your trading commissions were zero, you still lost to the market.

But much more important is the big picture.

As Wiggins says:

The present environment for investors – defined by noise, emotional stimulus and an absence of friction – will almost certainly drag many of us away from investing and towards gambling, where our actions will be increasingly short-term and speculative with poor odds of success.

This is in the interests of some in the industry but certainly not most investors.

Have a great weekend.

[continue reading…]

Can you achieve financial freedom on a working-class income, or if you come from a working-class background?

Does working-class financial freedom look the same as other forms of FIRE?

What even is ‘working class’ anyway?

What’s in a name?

I don’t know about you, but I struggle with the term working class. 

What does it mean? Who qualifies? 

Is my flat cap flat enough?

Is my collar too faded to be properly blue?

Currently the most widely accepted way of defining class is through socioeconomic background.

Look back at your parents’ occupations when you were 14. Were they employed in manual or service jobs? Did they work as drivers or machine operators or cleaners? Were they long-term unemployed?

If so, then you probably fit the standard definition of working class.

Work and class

When I was a kid my dad drove a bus. Meanwhile my mother stayed home and took on odd jobs – like cleaning and childminding – to make ends meet.

We had no money for extras, or even for things that most people would consider essential. If we needed anything that had to be bought new – like school shoes – we would get creative. We’d set up a table at a jumble sale and sell our old clothes. Or we’d make something from the odds and ends of furniture found in skips to drum up a bit of extra cash.

A lot of my early memories are of playing in a blanket fort under a trestle table in a church hall.

Before anyone takes out the tiny violins, I should add that I had a great time. My dad drove a bus! And I got to rummage in skips!

Yes, foreign holidays and restaurant meals are great – but have you ever experienced the thrill of finding a complete Victorian marble fireplace abandoned in a back lane? You don’t know what you’re missing.

I was working class, firmly and unarguably. So were my parents, my grandparents, and their grandparents – as far up the family tree as the eye could see. There was no such thing as inheritance, because nobody owned anything or earned more than they needed.

And that was fine. It certainly cut down on the family feuds at funerals.

We practised what is apparently now called loud budgeting. In other words, we were upfront about how much we had – or not. If somebody invited us somewhere, we’d check how much it was going to cost and cheerfully say no if we couldn’t afford it.

Nobody had a problem with that. Everyone had their own challenges.

Working class hero

I was working class, and happy to be so.

But then my parents did something bold. They stepped out of their box – or more accurately, they pushed me out of it.

When I was ten they sent me to sit the entrance exam at a private girls’ school.

To my surprise, I got in. And I didn’t just get in! I won a scholarship.

Because we were broke, I also qualified for a government assisted place – a scheme meant to improve social mobility by funding places for poor kids at elite private schools.

Between the two funding pots we didn’t have to pay a penny in school fees. Which was just as well, because we could barely afford the uniform.

So off I went to my fancy new school, loaded down like a Buckaroo mule with my cookery basket, hockey stick, and enormous schoolbag. Every morning I lumbered at top speed through the council estate so that I wouldn’t get beaten up.

It didn’t go well – unsurprisingly. 

The girls at my new school kept asking me where I stabled my pony and how often my family went skiing. Nothing in my life so far had prepared me for such questions. I’d spent the previous summer making a hammock out of a collapsed bit of fence by the old railway line. I had a side hustle charging 20p to walk people’s dogs so that I could buy a mix-up at the corner shop.

I quickly learned not to mention my life at all.

The trick, I found, was to watch and imitate the other kids. 

Classification

Studying the other kids taught me a lot about people’s awareness of money – and about what happens to families when they lose their money.

Let’s just say that private schools are not very charitable in those instances. 

I could write a whole Rich Dad, Poor Dad-style book about the effect of private school on my perception of wealth. It certainly shaped my ideas of working-class financial freedom.

Imitating the other kids kept me out of trouble, but it also messed with my own perception of class.

Was I still working class? I was just as poor as I’d always been. My parents were still working manual jobs. I was still running through the council estate every day.

Nothing had changed. But people at home had started to treat me differently. 

By the time I was 14 I was in a full-blown identity crisis, neither fish nor fowl. I had an accent that careered unpredictably from regional to posh.

In the evenings I routinely scouted the back lanes for change that people had dropped, while at lunchtime I sat next to a kid whose dad was on the board of Northern Rock. (Sadly I was not aware of the irony at the time.)

Class and hard work

My response to being a perpetual outsider was to double down at school. I decided that since I was there anyway, I was going to get the most from it that I possibly could.

I worked hard, and then even harder. Not having a social life was pretty handy in that respect.

It didn’t go unchallenged. Random Barbour-clad parents would stop me in the street to find out my latest test scores and interrogate me about who my private tutors were. But in the end I came out of that school with a set of results that made people blink in astonishment. 

(Did you know that the kid who gets the highest A-Level result in the country gets sent a special certificate? I can show you if you like…)

However I also came out with a sense of detachment from all class-based norms and customs. It wasn’t easy for me to connect to any of them. And that has stayed with me. 

I still don’t ski, or ride horses, or drink martinis at the country club. I have no intention of doing so.

But I also don’t want to buy a round at the pub or go on holiday to Benidorm with the girls or take out payday loans. 

I became classless.

And then into that void floated the idea of financial freedom, working-class style. 

I realised that I was going to have to develop my own goals and shape the life that I wanted. And that it was going to be different to anything I’d encountered in any social class. 

At work on class

Since then, I’ve run into plenty of FIRE people online who have similar ideals and aspirations.

But I’ve never come across the exact mix of lifestyle, saving, and spending that I’ve developed, or that I aim for. I’m still trying to imagine for myself a life that doesn’t seem to exist anywhere except in my own head.

So am I working class, or middle class, or upper middle class, or an ‘emergent service worker’  – or am I something else now? 

I shop at fleamarkets. I take public transport everywhere. Frequently I buy the food with the yellow discount stickers. I have never darkened the doorway of a Waitrose. 

But…

I am highly (possibly over-) educated. I have far more money in savings than anybody I know.

Also I take part in activities that apparently are well and truly ‘elite’ (according to the BBC’s slightly bizarre class calculator). 

FIRE exit

I’ve come to the conclusion that I am indeed something else. I think of it as escape class.

Escape class is characterised by a gleeful and anarchic form of strategic frugality. 

I will happily dispense with frippery while accumulating money in tax shelters. I’ll teach my kid about investing while sending him to community college. I will build up a vast private library of rare books while living next door to an HMO with a permanent guard of vest-clad lurkers. 

Then eventually I will get to escape the rat race, and all the restrictive social rules that come with our social roles.

I may not fit into narrow definitions of working class anymore, and I don’t entirely fit the FIRE model that is floating around these days.

But one thing that’s stuck with me from my working class upbringing is the idea that the System is the Enemy and must be Beaten.

I was never quite sure what that meant, and I’m still not. But I take comfort in the fact that whatever the System is, I’m well on my way to beating it.

Do you feel like you want some financial freedom in your life, but you’re not sure where you fit in? Then please do join me in escape class.

I can budge up – and there’s plenty of room for more.