Investing - Why Overpriced May Be Better Than Inexpensive

Are you the type of individual who recognizes you shouldn't trade stocks, mutual funds and ETFs frequently, but simply can't seem to stop? Or are you a financial advisor who trades more often than you would like to? Let me propose an unorthodox solution to provide some negative reinforcement each time you trade.

This is a solution I don't believe many financial advisors would endorse and certainly one I would not use from a pure dollars-and-cents perspective. This is a solution that should only be considered if you have trouble minimizing your trading addiction.

If you are a frequent trader, you are likely using a discount broker who offers trades at very low fees or even no fee in some cases. There is no instant disincentive to trading frequently. When you want to trade, you can do so without giving much pause to the cost of your action.

My solution is the following. Move your investment accounts to an old-fashioned brokerage that charges an arm and a leg for each trade. Instead of looking for the least expensive trading solution, select the most expensive institution that makes the hit you take on each trade as painful as possible. Use this painful, expensive trading expense to make you take pause and think through your trading decision more fully. Allow this pause to give you the time to allow emotion to ebb from your decision-making. Take the time to consider why you think something has changed from your original purchase.

Making good financial decisions is almost entirely about recognizing when our decision-making process runs astray, then putting in place mechanisms and processes to short-circuit those processes. Making trading excessively expensive is one example of doing this and may be a large enough barrier to minimize your trading habit effectively.


Chad Nehring, CFP said...

Or how about picking an asset allocation you can live with, and then living with it. Turn off the TV, stop watching Financial Pornography!

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