The evolution of self-directed investing through discount brokerage platforms has driven the cost per trade down from $29 a decade ago to $9.99 at big bank brokerages today. Some discount brokers (like Questrade) offer free ETF purchases, and one platform – Wealthsimple Trade – even offers commission-free trading of stocks and ETFs with no account minimum.

To be clear, this democratization of stock and ETF trading is a net positive for DIY investors who can contribute to their portfolios more frequently without worrying about incurring hefty trading fees. But there’s a downside to commission-free stock trading that has been brought to light during the coronavirus pandemic. 

The Wall Street Journal reported that online brokerages are seeing record spikes in new accounts and trading activity in recent weeks. The authors argue that this trend is due in part to the industrywide move to zero-commission trading through platforms like E*Trade and Robinhood, and exacerbated by the fact that many individual investors have more time on their hands to trade as they work from home.

“Many are young and first-time traders confronting the first economic downturn of their professional lives. Yet with free trading at their fingertips and massive online communities with which to discuss trading ideas, many figure they have little to lose.”

Robinhood has amassed more than 10 million users since launching in 2015, with a median client age of 31. Nearly half of its users are first-time traders.

This article uses American data, where commission-free stock trading has been around for some time. Canada is slightly behind the times, but Wealthsimple Trade has seen a similar trend north of the border. Its clients are trading into this volatile market to a staggering degree.

This graphic shows the most traded stocks on Wealthsimple Trade this quarter. Aurora Cannabis led the way in January and February, before being overtaken by Air Canada at the end of March. 

We tracked the most-traded stocks on Wealthsimple Trade this quarter and the results couldn’t be more appropriate for today. pic.twitter.com/p4sDN6r6JS

— Wealthsimple (@Wealthsimple) April 20, 2020

So what is going on here? 

Obviously young investors have been drawn to the commission-free platform and they’re looking to hitch their wagon to the fortune of individual stocks that have either been hammered (Air Canada, Aurora Cannabis), or that have a compelling story (Shopify, Tesla).

But is this a new trend driven by more accessible stock trading platforms? Hardly.

For every story I’ve heard recently about investors losing their shirts trading oil ETFs, I can recall similar stories in the late 90s of investors day trading from their college dorm rooms and losing it all when the technology bubble burst. 

Speculators at that time were not dissuaded by trading commissions – not with the allure of easy profits to be made on the latest internet stock.

I hope this is a chance for investors to learn some tough lessons about investing (betting) on individual stocks in hopes of turning a quick profit. After all, the worst thing that can happen to a young investor is to have early success trading stocks. It’s not a path to riches over the long term – but just a matter of luck and being in the right place at the right time.

Why I Chose Commission-Free Trading

I invested in individual stocks for years and had some success – mostly because I started trading in 2009 when stocks began their incredible bull market run. I came to my senses in 2015 and switched to index investing, due in no small part to some of my energy stock picks getting cut in half.

Back then, at $29 a trade, I’d sensibly save up at least $3,000 before pulling the trigger on a purchase. When commissions fell to $9.99, I felt more comfortable putting $1,000 to work at a time. 

The way I see it, commission-free stock and ETF trades allow investors to put very small amounts into the market right away. And that’s a good thing. It’s what drew me to switch from TD Direct Investing to Wealthsimple Trade. Since then, I’ve bought as little as $100 worth of VEQT in my investment portfolio. 

Commission-free trades have been a great evolution in the low cost, self-directed investing journey. It’s especially great for passive investors who invest in a portfolio of ETFs. We can add small amounts to our portfolio and invest right away. We can rebalance for free by selling the ETFs that have risen in value and buying more of the ones that are lagging behind.

But I can certainly see the pitfalls of commission-free stock trading. The barrier to entry is almost zero, making it easy and affordable for new investors to start trading. That can be a dangerous experience for a novice investor.

Most of these cautionary tales are aimed at new investors, but there’s also the core-and-explore cohort who can get caught up in trading stocks – especially when it’s free to do so.

A Wealth of Common Sense blogger Ben Carlson shared his not so common sense strategy of having what he called a fun portfolio. This is where he’d allocated 5 percent of his portfolio to picking stocks to “scratch an itch to take more risk”.

Some of the lessons learned from this ‘fun portfolio’ during the market crash was checking on the performance way too often (daily), and buyer’s remorse or second guessing market timing decisions. 

These are just some of the reasons why, in the second edition of Millionaire Teacher, author Andrew Hallam removed “the 10% stock picking solution … if you really can’t help yourself” from his nine rules of wealth.

Final Thoughts

I’m all for lowering costs and making it easier for investors to trade. Sure, there are pitfalls to avoid when it comes to commission-free trading, but I’d argue that the positives outweigh the negatives in the big picture.

Trading commissions didn’t stop day-traders during the tech bubble, and didn’t stop speculators from trading distressed stocks during the great financial crisis in 2008.

Moreover, it’s unfair to paint this as a generational issue. Yes, young investors may be drawn to commission-free and mobile-only platforms like Wealthsimple Trade, but it’s not just Millennials who got burned trading cannabis stocks. Clients of mine in their 60s lost 95 percent of their non-registered investments betting on weed stocks. 

My takeaway from this data is not to avoid commission-free trading platforms but for self-directed investors to stop gambling on individual stocks and instead invest in a low cost portfolio of ETFs. 

Last month I wrestled with my pension decision and opted to take the lump sum (commuted value) rather than a deferred pension at age 65. That decision meant forgoing a ~$15,000 per year pension in retirement. Instead, I would receive a $290,000 lump sum – $134,000 in a locked-in retirement account and the remaining $156,000 paid in cash.

I received the lump sum cash payment on Friday. It’s strange to see more than an entire year’s salary ($110,500 after taxes) deposited into your chequing account. Fortunately, I’m a disciplined budgeter and have already mapped out a spending plan for the rest of the year.

First, I sent $30,000 over to my Wealthsimple Trade account to fully max out my available TFSA room (finally!). Next, I sent another $3,700 over to Wealthsimple Trade to max out this year’s available RRSP contribution room. I’ll use the funds to add to my holdings of VEQT in both my RRSP and TFSA.

The funds for my LIRA have not arrived at TD Direct Investing yet, but when they do I’ll also purchase VEQT in that account and hold it there until retirement.

The other major change for our finances this year is that we’ll no longer have to withdraw from our small business account to meet our spending needs. We had planned to pay ourselves dividends, but instead any income earned this year will remain inside the business account where it is taxed at a lower rate.

Speaking of business income, it’s been surprisingly steady this year despite the disruption caused by COVID-19. While web traffic and advertising have slowed by 30 percent or more, I’ve been busier than ever with freelance writing and my fee only financial planning service. It’s good to have multiple income streams.

Finally, we’re resigned to the fact that we’re likely not going away this summer and so we want to make the most of the time we spend at home. We’ve purchased some new patio furniture and spent the weekend cleaning up our backyard. We’d also like to buy a hot tub and so we’re exploring our options there. 

Don’t think we’re splurging just because there’s a large lump sum in our chequing account. Instead, I think of it as using our travel refunds to invest in our stay-at-home experience this year and beyond.

This Week’s Recap:

I managed just one post here this week when I looked at changing investment strategies after a market crash.

This post remained incredibly popular – the top ETFs and model portfolios for Canadian investors.

Over on Young & Thrifty I wrote about how to invest in oil through stocks and ETFs.

I also looked at borrowing to invest when the market is down.

Promo of the Week:

I’ve been catching up with some the recent changes at Willful Wills – the online platform where you can create a will for as little as $99. I initially reviewed Willful Wills two years ago.

They still have the same the pricing plans – $99 Essentials (just a will); $149 Premium (will an 2 Power of Attorney documents); $249 Couples (will + POAs for two people).

Willful is now available in seven provinces (Ontario, BC, Alberta, Sask, MB, NS, NB).

They’ve added the ability to account for pets (assign a pet guardian + leave money for their care), and added a charitable giving feature (ability to leave a $ amount to a charity, and ability to leave a % of your residual estate to charity).

Willful has created more than 20,000 documents since launching in 2017. They’ve also given out over 1,300 plans to frontline healthcare workers during COVID (healthcare workers can apply here), and are currently offering a free printing/shipping offer.

While the law still doesn’t allow for digital signing, witnessing, or online storage of wills or POAs, Ontario’s new emergency order does allow for virtual witnessing – and Willful has launched a partnership with Notary Pro to help Willful customers get their wills virtually witnessed (and we’re watching legislation in other provinces hoping they follow suit).

Whether you’re creating your first will, or need an update, be sure check out what Willful has to offer.

Weekend Reading:

Michael Batnick answers the question, why aren’t stocks down more? I’ve been hearing that a lot lately.

Even a common sense investor like Ben Carlson has a stock picking side. Here are some crisis investing lessons learned from his fun portfolio.

Here’s Millionaire Teacher Andrew Hallam on financial experts trying to time the market:

“If you sold some of your investments because you think stocks will fall, you are thinking like a hedge fund manager. If you have suspended your regular investment contributions while you wait for the markets to stabilize, then you are thinking like a hedge fund manager. If you have money to invest but you want to wait for stocks to fall even further, you are thinking like a hedge fund manager.”

How are your investments protected? This MoneySense article explains the role of the CDIC and CIPF, and breaks down the different kinds of protection each offers.

Here are two conflicting views regarding when to take CPP. (I recommend deferring CPP to age 70):

1. Jonathan Chevreau reconsidered when to take CPP benefits amid COVID-19 risk and elected to take it at 66.
2. Rob Carrick argues that the pandemic makes it even more sensible to delay the start of CPP retirement benefits.

The Alberta Investment Management Corp (AIMCo) made a $3 billion blunder with a volatility trading strategy (options and derivatives):

“It’s not very hard to lose $3 billion selling volatility,” said one quantitative hedge fund manager who frequently trades with the likes of AIMCo. “You’re doing stuff that has a minus-infinity potential outcome.”

Check out this podcast interview with Millionaire Teacher Andrew Hallam on whether you should try to time the stock market.

In his latest Common Sense Investing video, PWL Capital’s Ben Felix explains why the stock market is not the economy, and the economy is not the stock market:

Worried about your RRSPs tanking? Michael James on Money says, so is the Canada Revenue Agency.

An incredibly brave post from Kind Wealth founder David O’Leary, who shares how he filed for bankruptcy at age 25.

Finally, this powerful piece in the New York Times is worth a read: My restaurant was my life for 20 years. Does the world need it anymore?

Have a great week, everyone!

Investors should take great care to choose an investment strategy they can stick with for the long term – in both good times and bad.

The problem is we make our decisions about risk tolerance and asset allocation in a vacuum. Our retirement portfolio isn’t at stake when we fill out a questionnaire. Then markets open the next day and our original target mix gets immediately thrown out of whack.

Overconfidence and Risk Tolerance

It’s easy to feel overconfident about our risk tolerance and investing ability when markets are soaring. And, without proper rebalancing, there’s a good chance your portfolio was overweighted to stocks after markets climbed 20+ percent in 2019.

Then March 2020 happens and stocks fall 35 percent in just one month. Suddenly, investors were scrambling to “de-risk” their portfolios. But the damage had already been done. 

I’ve answered many reader questions about changing investment strategies after a market crash. One asked if I still recommend my one-ticket investing solution, Vanguard’s VEQT, given the recent market turmoil. My answer: a resounding yes!

To be clear, I didn’t invest in an all-equity portfolio like VEQT thinking global stocks only go up in price. In the 30-year period dating back to 1990, U.S. stocks were up 21 years and down in nine of those years. That’s a 30 percent chance in any given year that stocks would fall in value. 

Volatility

Investors also talk about volatility, and perhaps waiting on the sidelines until things return to normal. But I’d argue when exactly are things “normal” in the stock market? Volatility is the name of the game. In nine of the 30 years between 1990-2020, stocks were up more than 20 percent. In three of those years, stocks were down 16 percent or more. What’s normal?

I get it. Nobody wants to lose money in their investment portfolio. And losing 35 percent of your portfolio in such a short time is shocking to see. But stepping back to see the big picture reveals that Canadian stocks are down 17 percent on the year, while U.S. stocks are down just 13 percent. That’s hardly outside the normal distribution of short-term stock returns.

What I think I’m really hearing from investors is they were taking too much risk in their portfolio leading up to the recent market crash, and now they realize a more balanced portfolio is needed. That’s perfectly fine. It’s just that market crashes are a painful way to learn about your true risk tolerance.

Adding bonds is the best way to reduce the volatility in your portfolio. Vanguard’s VBAL, which represents the classic 60/40 balanced portfolio, fell less than 20 percent at the market low in March, and is now down just 7 percent on the year. That ride is easier on the stomach than VEQT, which fell 27 percent at the low and is still down 11.5 percent in 2020.

Changing Investment Strategies

One trend we saw after the 2008 market crash was for investors to break up with their mutual fund advisor and flock to self-directed investing. After all, active managers couldn’t fulfill their promise to deliver all the upside while protecting the downside. All investments got clobbered.

I can see this trend continuing when investors open their March investment statements and realize their actively managed mutual funds failed to guide them unharmed through the market crash caused by a global pandemic.

This is one time I will advocate for changing investment strategies amid a market crash. If paying high mutual fund fees didn’t deter you from switching to a low cost investing option, perhaps a portfolio decline in the 20+ percent range will be the catalyst.

Final thoughts

Investors shouldn’t be changing investment strategies based on market conditions. We know the expected range of outcomes in both the short and long term.

First, we need to ensure that we’re invested in a risk appropriate asset mix that will allow us to sleep at night. If you can’t stand the thought of portfolio falling 30 percent or more in the short term, then you need to dial back the risk and add more bonds.

Next, in the face of stock market corrections, crashes, or crazy volatility, we need to be able to weather the storm and stick to our plan. That could mean ignoring the news, reducing the number of times you check on your portfolio, and continuing with your regular contribution schedule. 

Finally, avoid market timing and trying to guess which direction markets are headed. Your active manager can’t do it, and neither can you. Switch to a passive investing approach, with an appropriate mix of stocks and bonds, that will capture the market returns minus a very small fee. 

If I panicked and sold VEQT at its low in March I would have missed out on the ensuing gains made over the following month. And if I step back and look at the big picture, I know my investments were up 20+ percent last year, and they’re only down 11.5 percent so far this year. 

Investing is a long-term game and we shouldn’t make investment decisions based on short-term results.