Before the Two-Minute this week… Some of you have asked where the “Slap in the Face Award” is. It is not going out by email on Sunday, but it is on the InvestmentU.com website every Sunday. And that means I can respond to your comments at the bottom of the page.
Don’t ask me why I can do that and not respond directly to your emails, but whatever… it should be fun. Hope to see you there.
OK, here’s your Two-Minute.
Alex Green, the Chief Investment Strategist of The Oxford Club, and I were having dinner last week, and I mentioned that 401(k)s are now offering a brokerage (self-directed) option. Alex asked if that meant anyone could trade their self-directed 401(k) just like a discount brokerage account.
When I said yes, he got a terrified look on his face.
He then said this will be a disaster. Giving the average person access to trade their retirement money will be a total and complete disaster.
I couldn’t agree more.
The worst thing that has ever happened to the small investor is the ability to trade their accounts themselves at ridiculously low Internet trading costs.
Don’t jump on your email yet to tell me I am off my rocker. I know it saves money on the trading side, but owning stocks isn’t about saving money, it’s about making it.
Hear me out.
When it cost at least $100 to buy or sell 100 shares of stock, and it was as much as $120 to $150 depending on the brokerage, everyone thought twice about jumping in and out of their positions.
A $200 to $300 round trip was no joke! If you had a $5,000 position and made 20%, you lost 20% to 30% to the trading cost.
My broker charges me $7.50 a trade for an unlimited number of shares. At that price and with immediate access to his accounts, the small investor has the worst possible things he could ever imagine working against him, himself and cheap trading.
Everything we know about the average investor tells us he is incapable of buying low and selling high and always jumps in and out of the market at exactly the wrong time. And it’s always based on guesswork.
His decisions are fear based, have no basis in market reality and he always, yes, always, loses money.
Give the little guy a chance to make a bad money decision, and that’s what online trading has done for most, and I guarantee you he will.
And as we age, our risk tolerance decreases, our anxiety about running out of money increases and our decision making becomes more reactionary and even more fear based.
We are either frozen in fear or running amok.
So, in this period of market volatility, that means prices are moving down, before you do something very costly, go back over what your long-term expectations were when you bought that stock. I guarantee it wasn’t jumping out with a drop in the market.
Jumping in and out of the market guarantees there is no long term and that usually means losses.
This market has run straight up for five years and it is finally doing what all markets have to do, selling off. Oh, and all markets go back up, too. If 2008 and 2009 taught us nothing else, it’s that markets will recover.
It may be cheaper and easier to trade stocks now, but for most that makes it easier to lose money, not make it.
Think long term!