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How a boring broker will make you richer

[1]What do you really want from your online stockbroker?

Security? Cheap dealing charges? Low or no annual fees? Special offers?

All well and good.

After five years of dealing online, however – and especially during the recent bear market [2] – I’ve discovered something else matters.

Something you may think sounds silly, but which will make you money long-term.

The number one thing to look for when choosing a broker

The best dealing screen is:

b o r i n g.

I appreciate that seems counterintuitive. Most online dealing platforms big up their bells and whistles. More Graphs! More Colours! More Data! Built-in Minesweeper!

You’d think we were going into space, not buying a few shares towards our nest egg [3].

But there’s a serious reason why ignoring such fripperies and choosing a broker with boring trading screens will help us make money.

Pivate investors who trade less do better. We want a trading platform that slows us down, not one that pyschs us up.

Studies prove frequent traders lose money

Terrance Odean, a professor at the University of California, conducted one study [4] of several that proved frequent traders do worse than average:

Using trading account data for over 60,000 households, the study found:

  • the average household earned an annualized return of 17.7%.
  • the 20% of households that trade the most earned a return of 10.0%.

The poor performance of those households that trade frequently is consistent with recent theoretical models of investor overconfidence. Our message is trading is hazardous to your wealth.

Look at that performance difference again: it’s incredible! The trigger-happy, confident investors returned 10% a year. Those who traded only averagely earned 17% a year – nearly twice as much – by leaving well alone.

I knew over-trading was a problem, as it costs more in fees, but I was pretty surprised when I read that performance difference.

Of course, there can be good reasons for trading shares. A business you loved might now stink, or the share price may have soared and you want to lock-in some profits.

Perhaps you need the money for a sports car!

But trading for no good reason is much worse than not trading at all.

Many trading platforms are designed to encourage you to execute more trades. Let’s not forget how brokers make their money.

Some trading platforms make you trigger happy

Below I’ve grabbed a few example screens from popular brokers and trading platforms.

In most cases I do not use these platforms, and I have not evaluated their overall offering. I don’t have an opinion about their service.

All I’m saying is that the colours, graphs and flashing will encourage you to trade far more than if you kept share certificates in the sock drawer, or if you used a boring online broker.

And we’ve just seen that over-trading hurts returns

Exhibit A: Online spread better IG Index

IG Index: Flashy platform [5]

IG Index: Flashy platform

IG Index, the online spread betting firm, has a trading screen that constantly flashes red and blue depending on whether things are rising or falling.

The screen above is for popular trades, but your portfolio also blinks and whirs like a fruit machine. This platform has won awards.

Spread betting is usually for more short-term punts than full-time investing, and I’m actually a great fan of IG Index.

But when I’m running investments as spread bets on there, I try to use different websites’ tools to monitor my underlying holdings. I avoid logging on to IG Index.

If I keep the IG Index screen open, my heart beats faster, my mouse hovers over the various trading buttons, and I get giddy with the urge to Do Something.

It’s a reflex response to all the activity on-screen.

Exhibits B and C: Trade Trakker and Trader Workstation

See red with Trade Trakker [6]

See red with Trade Trakker

Option Trader: to buy or sell or buy or sell or... etc etc [7]

OptionTrader: To buy or sell or buy or sell or buy or sell or...

These screens are from advanced packages aimed at serious desktop trader-warriors.

The top screen is from a ‘a powerful portfolio management software program’, the bottom is an options trading subsection of a broader package.

I haven’t used either. I’m only citing them here as an example of the sort of thing the average armchair investor wants to steer clear of with barge poles.

If your online brokerage account has any resemblance to packages like these (and most are evolving this way), then you’ll probably be in the over-trading bracket before long.

Do you want to trade like the professionals?

You might think it’s advantageous to see if a share is going up or going down right NOW. That’s what professional traders in the city demand, don’t they?

True, but that doesn’t mean we should also stick our hands in the fire.

Exhibit D: A London trader’s terminal a few years ago:

A trader's terminal screen [8]

Colour bind: a trader's terminal screen

In this professional display, when share prices rise they flash blue. When they fall they flash red. As a result, the screen constantly flashes.

Note the prices shown aren’t the stock prices, just the movements in this trading session.

Good for the professionals, so good for you? I don’t think so. Remember, stockbrokers make money by buying and selling shares, often by taking a percentage of each trade. Over-trading actually makes them richer.

Perhaps it makes sense for a professional trader with holdings worth of millions who wants to skim a penny off the price they pay. A screen flashing red and blue like a patriotic dancing girl might suit a 20-something banker headed for burnout [9].

But it’s excitement we can do without.

Long-term investors like us should fight the urge to buy and sell on a whim. Our only chance is to go our own way, not follow the market’s flow [2].

If you’re going to follow the market’s whims, buy index tracker funds [10] for near-market returns, and save a bundle in charges.

But if you’re determined to do your own thing by picking your own investments, then you don’t want to be scared into following the herd.

Exhibit E: A Reuters terminal screen:

A Reuters terminal screen

Reuters: which road to follow?

Reuters is one of the leading providers of financial information for analysts, stock brokers, financial journalists and other Cityboys.

You can see the clear influence of its terminals on the bells-and-whistles trading tools and online accounts offered to home investors.

But again, remember Reuters is targeting people who make their daily living from market movements.

If you are a broker or a market commentator, you will want to know what is happening in the markets every second.

But as a private investor, such information is only likely to lead to over-trading. And that will probably damage your performance, as found in the Berkeley study I quoted.

Saying I need pro-level tools to run my personal portfolio is like saying I need a forklift truck to move my furniture.

Sure, a warehouse worker needs a forklift truck at work, but at home he’s only going to make an expensive mess. Same with trading platforms.

How to spot a boring trading platform

I currently use several online brokers and spread betting accounts, each with their own advantages and disadvantages.

Not all quiet havens I’d like, as I admit didn’t give any thought to this when I opened these accounts a few years ago. (Honestly? I probably believed flashing prices and real-time graphs and so on were a good thing.)

My favourites accounts, from a user-interface perspective:

Operating on a need to know basis

I’m not saying I don’t want to be informed about my investments in the medium term.

I want to be informed, but at my own pace.

Set aside time once a week or month or even once a year to calmly consider [11] how your holdings are doing, what you need to buy, sell, trim or add to.

At such times, the huge range of investment tools out there is great, compared to the old days when you had to send away for annual reports or rely on newspaper tips.

Graphs, analysis, colours – all are useful enough when you’re making a sober decision about your shares.

Use them, but make decisions at your own pace, without distractions.

Don’t log in to do a routine check-up and find yourself trading. Avoid falling for the siren calls of hyperactive online trading tools, and you’ll avoid being rushed into over-trading.

Over time, such a approach will probably make you richer and closer to early retirement [3], or whatever your own personal financial goals are.

(Image credit: Luis Fabres [12])