Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Former Wall Street Trader: Here’s The Biggest Mistake People Make With ETFs

InvestorEducation / Exchange Traded Funds Sep 19, 2017 - 05:59 PM GMT

By: John_Mauldin

InvestorEducation

BY JARED DILLIAN : Pretty cheap to trade these days—$7 or whatever. Costs less than lunch. Some online brokers will give you the first 50/100/200 trades free. What a deal!

But there are consequences.

Have you ever gotten nervous about one of your positions, sold out of it, then watched helplessly as it shot up 40% in six months?


Chances are you are overtrading. And that’s one of the most common mistakes investors make, especially with ETFs.

High Commissions Are Better

I’m going to say something truly radical: high broker commissions are better.

Let me give you an example. You buy 2,000 shares of XYZ at $20 a share, paying a $7 commission. It goes up to $40/share. Hooray! But then it goes down to $30/share.

You panic and sell it, paying a $7 commission. It then goes up to $80/share. You cry yourself to sleep on your big, fat pillow.

What if your commission structure was not $7 per trade, but $.07 per share?

In this case, you would have paid a $140 commission to sell your shares of XYZ.

Would it have prevented you from selling it? Maybe!

Higher transaction costs force you to take a long-term view. You have to be pretty sure about the trade if you are going to pay your broker $140.

Talk to any broker at a full-service shop. They have clients with portfolios of stuff that hasn’t been touched for decades, largely because people weren’t willing to pay a commission to sell it.

Stocks generally go up over time. This is how people get rich.

With low commissions, everyone fancies themselves as a hedge fund trader, whipping around shares or SPY and QQQ (more like TVIX, actually).

A lot of my readers said that one of the main problems with ETFs is that they are too easy to trade.

Quote from one reader: “I have a tendency to give up and move on only to find out a year later I made a mistake and should have left my positions alone.”

Deep down, everyone knows that the best financial advice you could possibly get is to buy and hold… but nobody buys and holds!

ETFs for the Long Run

ETFs are funds. Just like mutual funds. You wouldn’t day trade mutual funds, would you?

At least, that is what Jack Bogle was saying years ago about ETFs. What is the point of buying and selling the S&P 500 intraday? What economic purpose does that serve?

Bogle is about 1/3 right. SPY is at the center of a huge derivatives complex—most of the trading activity is due to institutional hedging.

But yes, he is right. If you are an individual investor investing in the S&P 500, there is no reason to trade it intraday.

To be honest, there is no reason to trade most ETFs intraday.

For example, take the ETF EMLC, the Van Eck Vectors J.P. Morgan EM Local Currency Bond ETF. It invests in emerging market bonds—in local currency! A super important and interesting asset class.

Most EM debt is dollar-denominated, so this is both a bet on emerging economies and a huge bet against the dollar. It’s also very risky, because emerging market local currencies have a very checkered past. But cool!

There is no reason to day trade this ETF. It is something that you buy and hold—for years.

But:

  1. ETFs are listed on an exchange, and
  1. Commissions are low, so
  1. People think they need to be trading them all the time.

How to Be Smart

There are a couple of ways to outsmart yourself.

You could always move your account to a full service broker and pay $.07/share.

Or, a cheap way to do it is to pretend that your transaction costs are high.

Or, you can just tell yourself not to have such an itchy trigger finger and hang on to these trades a bit longer.

Particularly ETFs. ETFs are a curious rascal because they are so easy to trade and trade and trade, but most of them are actually meant to be held for years and years and years.

There are two mistakes investors can make—and they always make one or the other:

  1. Taking profits too soon
  1. Taking profits too late

Of the two, 1. is less forgivable. Somewhere out there, someone sold Apple at $12/share. In fact, lots of people did. Seemed like a good idea at the time!

Buy and hold, hold, hold, and let those returns compound.

Especially with ETFs.

Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble

As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets.

Now, he’s staking his reputation on a call that a downturn is coming. And soon.

In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules