Tahoe Market Pulse: Comparing stock ownership to a casino?
There is a price war on Wall Street and investors are benefiting. In February, Schwab cut its trading commission to $6.95 per trade. Fidelity responded by lowering its commission to $4.95. Schwab immediately matched that price.
Separately, Vanguard lowered expense ratios on 68 of its funds after similar moves by State Street and Blackrock.
When I began my career in the 1980s trading commissions were in the hundreds of dollars, mutual funds charged outrageous load fees, and prices were calculated in eighths instead of pennies so bid-ask spreads were larger.
Compare that to today. Investors can buy Schwab S&P 500 Index ETF (SWPPX) for $4.95, pay an annual fee of just 0.03 percent and outperform most of the high-priced actively managed funds.
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Still, some say Wall Street is rigged and compare stock ownership to a casino. If Wall Street is a casino, it’s one in which the odds heavily favor the players.
That’s not a typo. If the “players” are long-term investors success is almost guaranteed. That’s because stocks go up over the long term. Every stock market “correction” and bear market has been followed by a move to new highs.
For 20-year holding periods stock returns have never fallen below inflation. Bonds and gold can’t claim that. Since World War II, the average annual real (after inflation) return on stocks is 6.4 percent.
To stack the odds in your favor one must hold a broad market index and/or high-quality companies that pay dividends and raise them often, if not annually.
If, however, you constantly jump into and out of the market and hold low-quality stocks (think last week’s newly public company Snap Inc.) then the casino analogy isn’t far off.
As we saw after the technology bubble burst, low-quality stocks sometimes don’t come back or they disappear entirely.
Years ago, computers cost thousands of dollars, long-distance phone calls and faxes (remember them?) were billed by the minute and the commission to buy individual stocks depended on their price and the number of shares.
Commissions often ran to hundreds of dollars. Stocks were priced in dollars and fractions, not pennies as today. Times have changed. Investors have benefited.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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