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.
From Monevator
Fixing my portfolio and my brain – Monevator [Members]
Financial freedom, working-class style – Monevator
From the archive-ator: Why I’m saving and investing for the disaster to come – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Stocks bounce on cooler-than-expected inflation in US and UK – CNBC
UK economy disappoints despite return to growth – BBC
Investors pour billions into S&P equal weight fund as tech fears rise – FT
FCA could loosen mortgage rules to boost growth – BBC
What to expect from new pensions minister Torsten Bell – This Is Money
Property sellers in England and Wales make ‘lowest returns in a decade’… – Guardian
…and why – This Is Money
Freetrade faces investor backlash over its £160m acquisition by IG Group – Sky
Spain plans 100% tax for homes bought by non-EU residents – BBC
Silicon Valley’s largest start-ups to shun IPOs in 2025 [Search result] – FT
Trump 2.0 begins with US household balance sheets in great shape – Apollo
Products and services
Is financial advice just for the rich? – Which
Get two years free EV driving with this charger deal – This Is Money
How to get the best value from pension annuities – Guardian
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley. Terms apply – Charles Stanley
The best money-making apps and websites – Be Clever With Your Cash
Lifetime ISA faces an uncertain future due to Treasury review – Which
Ofcom enforces ban on surprise mid-contract telecoms price rises – Guardian
Open an account with low-cost platform InvestEngine via our link and get up to £100 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Vanguard defends home bias in UK LifeStrategy funds – Interactive Investor
How poor insurance sales practices give false confidence to customers – Which
Flats for sale in fashionable parts of cities in England, in pictures – Guardian
Comment and opinion
There’s always going to be a bigger boat – A Teachable Moment
What if stocks only rise 3%? – The Retirement Manifesto
Pursue the ‘unnecessary’ things in life – The Root of All
Mega cap world domination – A Wealth of Common Sense
[That] Rob Dix on the Seven Myths About Money [Podcast] – T.P.P. via Apple
Historical returns for all the main asset classes [US but relevant] – AWOCS
Why you don’t need to worry about budgeting – Next Big Idea Club
Five ways to manage drawdown in retirement – Humble Dollar
US valuations are not in a bubble – Simple Living in Somerset
Naughty corner: Active antics
Peel Hunt’s five equity income trusts for 2025 – Trustnet
Is the UK cheap? [Search result] – FT
Terry Smith’s Fundsmith underperforms for the fourth year – Morningstar
SJP: Investors should rotate into emerging markets and small-caps – Trustnet
Why Moderna and Pfizer have erased their pandemic gains – Sherwood
US TikTok ban mini-special
Americans still don’t realise what TikTok is – Garbage Day
The TikTok ban shows America is at war with itself – Kyla Scanlon
Kindle book bargains
Saving Time by Jenny Odell – £0.99 on Kindle
The Black Swan by Nassim Taleb – £0.99 on Kindle
Good With Money by Emma Edwards – £0.99 on Kindle
Number Go Up: Inside Crypto… by Zeke Faux – £0.99 on Kindle
Environmental factors
Climate ‘whiplash’ events increasing exponentially around the world – Guardian
Scientifically proving how whales found peace in war – bioGraphic
Nepal’s leader says it has too many tigers. Does it? – BBC
Easing climate despair by volunteering to clean up a local park – Guardian
How climate change could make London much colder [Search result] – FT
Cost to clean up toxic ‘forever chemicals’ could top £1.6tn in UK and Europe – Guardian
Robot overlord roundup
Apple suspends AI-generated news alert service after BBC complaint – Guardian
Five ChatGPT prompts to quit your job and become a digital nomad – Forbes
Amazon races to transplant Alexa’s ‘brain’ with Gen AI [Search result] – FT
That sports story you clicked on could be AI slop – Wired
OpenAI’s All in America blueprint is just a list of demands for the US government – Sherwood
Off our beat
Minimum levels of stress – Morgan Housel
The typical man disgusts the typical woman – Bet On It
Tiny Islands proves it’s still possible to live a life of contentment – Guardian
How GLP-1s change what people buy and eat – Two Percent [h/t Abnormal Returns]
The curious gems of the River Thames – Atlas Obscura
Confronting the consequences of falling global birth rates – McKinsey Global
Why skyscrapers became glass boxes – Construction Physics
Will this video game be the first ever billion-dollar entertainment made? – Guardian
Kevin McCloud of Grand Designs reflects on his life – The i Paper
Marina Hyde: it’s the tech bros inauguration derby – Guardian
Australian scientists dub unusually large new spider species ‘Big Boy’ – Independent
And finally…
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”
– James Carville, Strategic strategist to President Bill Clinton
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2 unrelated thoughts
1. The view that market timing never works is historically justified (in part) by “Anyway CGT and dealing costs wipe out your gains”. But if you are trading in an ISA with say 5 trackers and £10 a trade commission you can get in and out of the market for £50 a go with no tax implications.
2. Equal weight sp500 funds must surely be spending their whole time rebalancing?
Always enjoy your links but disappointing to see climate alarmism being promoted in such a lurid way by the FT. The mainstream media love apocalyptic stories, and of course predictions of imminent AMOC shutdown is juicy red meat in that respect, featuring a recurring cast of Stefan Rahmstorf and the Ditlevsen twins. Barely a few months go by now without alarming headlines of AMOC doom in the mainstream press usually traceable back to one of these prophets.
Just one problem – the evidence does not support their doomsaying. To be fair the FT journalist does acknowledge that their prophecies are not shared by the IPCC: however, this is not a ‘conservative’ position but actually the mainstream consensus. That is because many scientists have found no convincing evidence that the AMOC is on the verge of collapse. As an example, a major new research study was published this week showing there has been no significant decline in the AMOC over the past 60 years in spite of a warming climate [ https://www.sciencedaily.com/releases/2025/01/250115125052.htm ]. And the latest data on sub-polar sea temperatures shows this at record highs, i.e. the sub-polar ‘cold blob’ that Rahmstorf relies on is no more.
I raise this chiefly as an example of the problems with relying on the daily press (whether FT/Guardian/Torygraph etc) for environmental information, when their main purpose is sensationalism rather than sober factual analysis. Unfortunately, there are many academics working on climate issues who are happy to exploit this issue for their own benefit. For a deeper understanding of the problem can highly recommend the new book ‘Climate Change isn’t Everything’ by Professor Mike Hulme at Cambridge University – one of the world’s leading climate scientists and an IPCC panelist.
For most amateur investors currently investing in index funds is the way ahead
Chose a global equity index tracker and a global bond index tracker hedged to the pound-2 funds only-in an Asset Allocation suitable the place in your investment cycle ie 100% equities for 20 year olds to a 50/50 for retirees are two examples
Then leave investments well alone to compound -let the stockmarket do its thing -no tinkering-stay the course through thick and thin-do not trade!
This does require severe investor discipline!
The investor should then devote his investing efforts to those factors under his direct control ie save as much as you can,live frugally and keep costs down
That’s it!-will beat most other investment policies hands down
xxd09