Don't let cheap brokerage cost you money

What's not to like about cheap brokerage?

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Wow, it's been a long time between drinks in this space.

I wrote and published one piece early on in my holiday to the Red Centre. I wrote a second… but was foiled by the lack of internet access. (A blessing for some distraction-free downtime, but a curse for trying to get an article published!)

And after arriving back home last Wednesday afternoon, Thursday and Friday were full of the catching-up stuff that tends to follow time away.

The holiday? It was sensational, thanks for asking. In all seriousness, as I wrote last time, you really, really need to see more of Australia if you have the chance.

Yes, the rest of the world is wonderful, and I've been fortunate to see some of it… but what we have here on our own shores is just as, if not more, spectacular – not to mention cheaper, and quicker to get to.

Plus, if you haven't been outback, do yourself a favour. The landscapes are out of this world, and the people truly are incredible. (A shout out to John from Hawker Motors in Hawker, SA, who not only was working on a Sunday, but stayed open past 5pm because I needed a new tyre!).

Anyway, enough of my holiday stories and tourism exhortations.

Among some of the good news on my return was that the ASX had risen 3.6% over the past month. No, I've not turned into some short-term trader – a month is irrelevant to any long term investing horizon, after all – but it's always nice to return to a gain. More importantly, though, remember that when I went away, I didn't do anything special to my portfolio in preparation.

I didn't sell everything in case the market fell while I was away. I didn't set some so-called stop-loss orders that should instead be called broker-profit orders (if you didn't know, I'm not a fan – at all – of stop-loss orders. I've never, ever placed one. They're great for stockbrokers who get paid for activity… not so much for investors for whom volatility is just the ticket to the dance.)

So I just left my portfolio completely alone. I didn't check it once while I was away. I didn't worry about the ASX at all, actually.

Why? Because I have constructed a portfolio of companies that I hope will be market-beaters over 3, 5 and 10 (plus) years. There's almost nothing that's going to happen during a three-week holiday that'll change my view of a business.

When Pascal said "All of humanity's problems stem from man's inability to sit quietly in a room alone" he probably wasn't thinking specifically about investing. But he could have been.

There's almost certainly nothing to be gained from obsessing over general stock market volatility. Especially when you remember that said volatility comes from others who are doing precisely the same thing!

Remember: When we buy shares, we're implicitly saying to the market 'I think that company is worth more than you do'.

And then, as soon as we buy those shares, we ask the market what it thinks those shares are worth!

If that's not madness, I don't know what is.

But speaking of brokerage profits and share price movements, I was both pleased and a little dismayed to see that CommSec has announced cheaper brokerage on buying and selling shares.

According to the company's website (and for the avoidance of doubt, neither I nor The Motley Fool has any commercial relationship with CommSec, other than it being a broker I use), brokerage will now be only $5 per trade for purchases of up to $1,000 worth of shares.

Between $1,000 and $3,000 worth will cost only $10.

(There are the usual terms and conditions, and this one comes with the requirement to use a linked Commonwealth Bank of Australia (ASX: CBA) transaction account to settle your trades.)

Those prices are very cheap for a mainstream, CHESS-sponsored online broker.

Not cheapest, necessarily, but very cheap.

(I've talked a lot on the Motley Fool Money podcast about CHESS sponsorship, which is essentially a formal record of your ownership of ASX-listed shares. You can get cheaper brokerage without CHESS sponsorship, but as a form of insurance, it's like that old American Express tag-line: I wouldn't leave home without it!)

So… what's not to like about cheap brokerage?

Well, before I get to that, let me say that more money in my pocket, rather than CommSec's (sorry CBA shareholders) is a good thing.

And if it means more Australians will start – and keep – investing because of the lower barrier of brokerage, then that's a great thing, given the historically incredible wealth creation that has come from investing on the ASX.

Those things are worth celebrating.

And yet…

And yet, you probably know I'm a keen student of behavioural psychology in general and behavioural economics in particular.

So while more expensive brokerage is a barrier to some, perhaps many, people, it's also true that the advent of free (in the US) and cheap (here) brokerage has led to some awful outcomes.

Removing the psychological and monetary barrier of costly brokerage has allowed people to see trading as (almost) costless.

But the biggest cost isn't the brokerage itself.

It's the things we do when brokerage is (almost) free.

If there's no barrier to buying and selling, we'll do it more often. Which is precisely the opposite of sensible long-term investing.

And it lowers another barrier – the need to develop conviction in an idea before buying. My mantra has long been that I am 'slow to buy and even slower to sell'.

In other words, I want to make sure I really like the company, and the valuation, before jumping in. And, if I've got the 'qualitative' factors right, I'm going to be slow to sell; I'm going to give a quality business plenty of rope to prove itself (and I'll be less likely to be scared into selling by share price volatility).

But with cheap/free brokerage? You can buy on a whim today, and sell on a whim tomorrow. And with the 'gamification' of brokerage (predominantly in the US), investing can feel increasingly more like a computer game with regular dopamine hits, rather than slow, steady tortoise-not-hare wealth creation.

Me? If I got to design a brokerage model that was built to make money for investors (rather than to make money from investors!), I'd make it free to buy, but charge $100 per trade to sell.

Would it work as a business model? Maybe… but probably not. Because it'd probably discourage trading – which is the golden goose for brokers.

Remember, most of them make money not when you get wealthier, but when you trade more. Which kinda sounds more like a bookmaker's business model, when you think about it, huh?

Bottom line, though: don't cut off your nose to spite your face. It's true that some (many? most?) participants in the financial services industry have misaligned incentives. Few genuinely win when you do, preferring to use you as a revenue source, regardless of your success or otherwise.

But that doesn't mean you should be discouraged. It just means you should be aware.

Investing has created extraordinary wealth over time. And I expect that will continue for a long time to come.

So, invest. Pay less for (CHESS-sponsored) brokerage if you can. But remember that not everyone out there is trying to help you make money.

And now you know. So you can hopefully avoid the pitfalls on the way to long-term wealth creation. And save a few bucks on brokerage, along the way.

Fool on!

American Express is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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