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The Hidden Costs Of Trading

The Hidden Costs Of Trading

So, I'm a little curious: What does your work email look like?

Does a little window pop up on your screen every time you receive an email? Does your task bar flash when a colleague talks to you on instant message?

I call these little alerts "email dings" and they used to drive me CRAZY. I'd be in the middle of creating some complicated Excel model, and suddenly get interrupted by a pop-up saying, "You have 1 message!" Then I'd check my email, realise it was a useless piece of info, and try to get back to work.

Many of my colleagues turn on their email dings because they're afraid of missing an important email. But most of them are blissfully unaware that they're paying an enormous price in productivity: A "switching cost".

A 2003 study published in the International Journal of Information Management found that it takes a typical person 64 seconds on average to resume the previous task after being interrupted by email.

Since the average person checks email about once every five minutes and takes 64 seconds to switch back to work, that's close to TWENTY PERCENT of his/her workday wasted!

The "Switching Costs" Of Trading

Interestingly, we can draw parallels to the world of trading and investing.

How many times have you read about a trading strategy and got excited about it because it looks so great on paper? "1000% profit in three months? Awesomeness!!!"

Many of these published strategies focus on the hypothetical capital gains, but they leave out the real-world switching costs associated with jumping in and out of your investments.

Let's take commissions, for example. A typical stock trader in Singapore can expect to pay around $18-$25 in commissions per trade. If you perform 2 buy/sell trades per week, that's 50 bucks that you'll never see again. And we're not even counting the other costs like GST, the bid-ask spread or other fees!

Most people ignore these because it's much sexier to focus on the capital gains. Yet, trading costs have a bigger impact on performance than most people expect.

Researchers Brad Barber and Terrance Odeon, in a paper cheekily titled "Trading Is Hazardous To Your Wealth", found that households who traded the most had the worst performance among investors in the United States. The high cost of trading was cited as one of the main causes of their underperformance. It's a death by a thousand cuts.

Switching costs aren't just monetary in nature. Trading is stressful - a trader is constantly worrying about the next piece of economic news, how to exit the current trade in time, when the next opportunity will come, and thousands of other considerations.

These decisions have a subtle impact on other aspects of your life. Like the executive who's constantly checking his work email, it's hard to truly enjoy time with your family and friends when you're always thinking about the next trade.

Hold On For The Long Term

Thankfully, there's a much better approach to investing: Buy and hold for the long-term.

In other words, find a good portfolio of investments and stick to it. Stay invested for decades, not weeks or months. If you've done your research and know that you have a sensible, diversified investment, why would you want to sell it now?

Personally, I'm invested in a portfolio of globally-diversified stock and bond index ETFs. I make regular investments to smoothen out the price, but once they're in my portfolio, I never worry about them. I glance at my investment account once a month at the most.

I'd encourage everyone to give long-term investing a try. At the minimum, you'll save money by not trading in and out all the time. And as the research shows, you're more likely to come out profitable over the long-term.

Instead of constantly looking out for the next trade, focus. Focus on growing your long-term wealth instead of the short-term market fluctuations. Focus on doing amazing work at your career without being constantly interrupted. Focus on spending time with the people you care about and doing the things you love.

But first of all, turn off your email ding.

 
Lionel Yeo
Lionel Yeo

Lionel Yeo is a ramen slurper, bathroom dancer, and financial hacker behind cheerfulegg.com, a personal finance blog for young executives. Download his free ebook Small Tweaks to learn how to automatically save $300 a month with just a few tiny changes.