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Making fewer — but thoughtful — trades usually better than rushing from deal to deal

By Gary Brooks

Contributing writer

Charles Schwab, Fidelity and eTrade offer 500 commission-free trades for new accounts. They want you to treat your financial security like a video game.

That is, keep constant watch on the screen, respond to signals (red down arrow, sell … green up arrow, buy). Let your intuition guide you and respond frequently with an absurd amount of trading to stay a step ahead of changing investment opportunities.

More likely this will leave you a step behind.

These accounts come with a two-year window to utilize the free trading on stocks, exchange-traded funds and options contracts. The incentives are positioned to help you profit when the brokerage firms will likely profit more over time.

Brokerages are willing to offer these deals because they hope the offer will establish a highly active investment style that will continue well beyond the two-year window. They want you to speculate on every seemingly compelling blip on the investment radar to eventually increase their revenue from transaction fees.

Even if you were making monthly contributions to your accounts, investing that new money and rebalancing your holdings periodically, I can’t envision a scenario where anyone would need to make 50 trades over two years, let alone 500.

For people who aren’t making frequent contributions or withdrawals, it might not be necessary for trading activity to even reach double digits most years.

“The stock market is designed to transfer money from the active to the patient” is one of Warren Buffet’s most quoted lines. Most investors would be wise to follow another suggestion of Buffett’s.

Whenever he is asked to give young people advice, he says they should think about their investment opportunities as if they have a punch card with only 20 spots on it representing the number of buys they get to make in their lifetime.

With such limits, you would make fewer and larger investments. You would invest only when you had high confidence in the margin of safety an investment provided along with potential to profit.

Following this line of thinking, it would be better for investors to have higher trading costs rather than low or no trading cost. Perhaps this would make people pause and think more deeply about an opportunity rather than respond impulsively to the daily ups and downs of the market.

In the encyclopedia of successful investing, you’ll never find a reference to free trades or how to capitalize on short-term market movements. As Vanguard founder Jack Bogle has long professed, “The stock market is a giant distraction to the business of investing.”

Most successful investors understand that time in the market is more profitable than timing the market. Devising strategies, or “nudges,” to help people improve their behavior as investors and consumers is largely why Richard Thaler was recently named winner of the Nobel Prize in Economic Sciences.

In many cases, rather than picking the right investments at the right time, it’s simply managing your behavior around market events — the tug-o-war between fear and greed — that leads to financial independence.

If you spend the time to devise an investment strategy that is globally balanced and aligned with your goals, there aren’t very many reasons to trade.

Occasionally:

▪ You might have a cash flow event that requires buying or selling (a need for withdrawals in retirement to supplement your income or new contributions if you are still saving.)

▪ If you intend to be disciplined about the desired level of risk in your portfolio, you’ll need to rebalance from time to time to shift the weight of stocks and bonds back to the pre-defined target.

▪ Something might truly go wrong with an investment and reduce its future prospects. If you would not buy it again, given what you now know, it’s OK to trade.

▪ A worthy new investment opportunity might present itself infrequently.

▪ You might have a tax-related reason for selling a position that has a capital loss to be used to offset capital gains and reduce taxes owed.

▪ You might inherit accounts with positions that don’t fit your investment preferences. It’s better to revise the portfolio than hold what your parents or grandparents did.

All told, the fewer decisions you have to make, the less likely you will be to make one that is harmful.

Sometimes, you’ll have to overcome temptation and human nature to act, but you’ll probably end up better off if you invest your time in something you enjoy rather than trading in search of the next big thing.

Gary Brooks is a certified financial planner and the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor. Reach him at gary@bhjadvisors.com.

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