Tanya Steinhofer No Comments

Recent media related to Michael Lewis’s new book “Flash Boys” and an opinion piece in the New York Times titled “The Hidden Cost of Trading Stocks” might cause the ordinary investor to wonder if they should even bother investing if the playing field is so uneven.

While many of the claims that Michael Lewis and the New York Times article make are true, they are largely irrelevant to long‐term patient investors.  It is true that professional traders at large brokerage firms have an advantage when they build high‐speed fiber optic cable feeds directly into the computers at the exchanges that match buyers and sellers of securities. And some of them even buy information about who wants to buy and sell, which gives them an edge over the retail investor sitting at his computer. It is also true that brokerage firms might be directing trades to the firms that give them the largest rebates for trades instead of seeking best execution for their clients.

Why are these unfortunate practices irrelevant to you? Because the money the professional traders are making at others’ expense is coming largely out of the pockets of day traders, who are foolish enough to think they can earn outsized returns by picking the best stocks. It doesn’t really matter how many times the stocks held in the mutual funds you own are traded in a given day or at what price. What matters is whether the companies whose stock you own in your mutual funds are creating value by growing their businesses. Whether you lose a few fractions of a cent on the sales price when you eventually sell a fund has very little impact on your long‐term performance.

Articles and books like these reinforce my belief that the best way for most of us to invest is to take a long‐term approach and use low‐cost index funds that aren’t trying to beat the market.