Dick Cooley, the former CEO of Wells Fargo, once defended Wells Fargo’s foreclosure practices to Congress by saying: “The bank isn’t your friend.” The idea was that the borrower shouldn’t let free cookies, newspapers, and coffees in the branch location (maybe even coupled with a friendly face from the teller) delude the borrower into thinking that the bank would not foreclose or exercise all of its legal rights against you in the event that you defaulted on a loan.
Similarly, every fin-tech brokerage house (Acorn, Betterment, Robinhood, Stash, Stockpile, TD Ameritrade, WealthFront, and so on) advertises ease-of-transaction services that make it unusually easy to buy or sell a given stock. I believe this is no friend to your long-term wealth.
From 2012 through 2015, investors that downloaded apps and made investments through them had a 46% rate of selling a stock within six months (according to the Vanguard whitepaper “The Digital Investor: Financial Attention Through Multiple Digital Channels). For investors that rely upon a Desktop, the rate is 16%. As a result, an investor that uses a cell phone rather than a laptop to execute trades is almost three times as likely to engage in annual turnover.
The problem with turnover over half of your investment portfolio is that such an approach is speculation, not investing.
As famed trader Jesse Livermore once said before his suicide after losing almost the entirety of his fortune:
“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”
An investor needs to reorient himself to think that investment wealth comes from the selection of great long-term businesses and then the indefinite holding of those investments year after year, decade after decade. When it comes to allocating your time, you should be improving your marketable talents and increasing the hourly rate of your labor as much as possible so that you can generate a surplus. And with that surplus, significant time should be dedicated to researching the right investments that can be held indefinitely (S&P 500 Index funds, small-cap value index funds, Coca-Cola and Johnson & Johnson and ExxonMobil stock, etc.).
The action of turning over investments is not where the wealth is created. It almost invariably leads to selling low, buying high, and just churning through businesses at various points in their business cycles. So much more money can be made by just getting the companies right in the first instance and then harvesting the fruit that is produced. Fintech apps and other opportunities to make daily micro-managing decisions is not the way to wealth.