What caught my eye this week.
A nice coincidence saw Joe Wiggins at the Behavioural Investment [1] blog write about the downsides of friction-free investing in the same week that Freetrade was acquired [2] 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 [3] of the world’s best companies for peanuts. Choose the right cheap platform [4] and it’ll cost you very little to let it compound for decades.
However we still have the biggest hurdle to get over – ourselves [5]!
Free love
It’s not yet clear what the consequences of zero-fee trading [6] 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 [7] 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 [8] [Members [9]]
Financial freedom, working-class style – Monevator [10]
From the archive-ator: Why I’m saving and investing for the disaster to come – Monevator [11]
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 [12]
UK economy disappoints despite return to growth – BBC [13]
Investors pour billions into S&P equal weight fund as tech fears rise – FT [14]
FCA could loosen mortgage rules to boost growth – BBC [15]
What to expect from new pensions minister Torsten Bell – This Is Money [16]
Property sellers in England and Wales make ‘lowest returns in a decade’… – Guardian [17]
…and why – This Is Money [18]
Freetrade faces investor backlash over its £160m acquisition by IG Group – Sky [19]
Spain plans 100% tax for homes bought by non-EU residents – BBC [20]
Silicon Valley’s largest start-ups to shun IPOs in 2025 [Search result] – FT [21]
[22]
Trump 2.0 begins with US household balance sheets in great shape – Apollo [23]
Products and services
Is financial advice just for the rich? – Which [24]
Get two years free EV driving with this charger deal – This Is Money [25]
How to get the best value from pension annuities – Guardian [26]
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley [27]. Terms apply – Charles Stanley [27]
The best money-making apps and websites – Be Clever With Your Cash [28]
Lifetime ISA faces an uncertain future due to Treasury review – Which [29]
Ofcom enforces ban on surprise mid-contract telecoms price rises – Guardian [30]
Open an account with low-cost platform InvestEngine via our link [31] and get up to £100 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine [31]
Vanguard defends home bias in UK LifeStrategy funds – Interactive Investor [32]
How poor insurance sales practices give false confidence to customers – Which [33]
Flats for sale in fashionable parts of cities in England, in pictures – Guardian [34]
Comment and opinion
There’s always going to be a bigger boat – A Teachable Moment [35]
What if stocks only rise 3%? – The Retirement Manifesto [36]
Pursue the ‘unnecessary’ things in life – The Root of All [37]
Mega cap world domination – A Wealth of Common Sense [38]
[That [39]] Rob Dix on the Seven Myths About Money [40] [Podcast] – T.P.P. via Apple [41]
Historical returns for all the main asset classes [US but relevant] – AWOCS [42]
Why you don’t need to worry about budgeting – Next Big Idea Club [43]
Five ways to manage drawdown in retirement – Humble Dollar [44]
US valuations are not in a bubble – Simple Living in Somerset [45]
Naughty corner: Active antics
Peel Hunt’s five equity income trusts for 2025 – Trustnet [46]
Is the UK cheap? [Search result] – FT [47]
Terry Smith’s Fundsmith underperforms for the fourth year – Morningstar [48]
SJP: Investors should rotate into emerging markets and small-caps – Trustnet [49]
Why Moderna and Pfizer have erased their pandemic gains – Sherwood [50]
US TikTok ban mini-special
Americans still don’t realise what TikTok is – Garbage Day [51]
The TikTok ban shows America is at war with itself – Kyla Scanlon [52]
Kindle book bargains
Saving Time by Jenny Odell – £0.99 on Kindle [53]
The Black Swan by Nassim Taleb – £0.99 on Kindle [54]
Good With Money by Emma Edwards – £0.99 on Kindle [55]
Number Go Up: Inside Crypto… by Zeke Faux – £0.99 on Kindle [56]
Environmental factors
Climate ‘whiplash’ events increasing exponentially around the world – Guardian [57]
Scientifically proving how whales found peace in war – bioGraphic [58]
Nepal’s leader says it has too many tigers. Does it? – BBC [59]
Easing climate despair by volunteering to clean up a local park – Guardian [60]
How climate change could make London much colder [Search result] – FT [61]
Cost to clean up toxic ‘forever chemicals’ could top £1.6tn in UK and Europe – Guardian [62]
Robot overlord roundup
Apple suspends AI-generated news alert service after BBC complaint – Guardian [63]
Five ChatGPT prompts to quit your job and become a digital nomad – Forbes [64]
Amazon races to transplant Alexa’s ‘brain’ with Gen AI [Search result] – FT [65]
That sports story you clicked on could be AI slop – Wired [66]
OpenAI’s All in America blueprint is just a list of demands for the US government – Sherwood [67]
Off our beat
Minimum levels of stress – Morgan Housel [68]
The typical man disgusts the typical woman – Bet On It [69]
Tiny Islands proves it’s still possible to live a life of contentment – Guardian [70]
How GLP-1s change what people buy and eat – Two Percent [71] [h/t Abnormal Returns [71]]
The curious gems of the River Thames – Atlas Obscura [72]
Confronting the consequences of falling global birth rates – McKinsey Global [73]
Why skyscrapers became glass boxes – Construction Physics [74]
Will this video game be the first ever billion-dollar entertainment made? – Guardian [75]
Kevin McCloud of Grand Designs reflects on his life – The i Paper [76]
Marina Hyde: it’s the tech bros inauguration derby – Guardian [77]
Australian scientists dub unusually large new spider species ‘Big Boy’ – Independent [78]
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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