FOOL ON THE HILL
The Cost of Day Trading
Last week the National Association of Securities Dealers (NASD) slapped the nation's second-largest day-trading firm with yet another hefty fine. The settlement covered losses claimed by a group of its customers. But after looking at the kind of fees and requirements the firm has, it's hard to believe anyone with open eyes could fall into this trading pit. When you consider how much active trading hurts returns, it's a wonder that these kind of operations stay in business.
Buy-and-Hold Beats Rapid Training
By Bob Bobala (TMF Bobala)
August 9, 2001
Morale among day traders must be at an all-time low these days.
Last week the Associated Press reported that the National Association of Securities Dealers (NASD) slapped another $456,000 fine on All-Tech Investment Group, which runs All-Tech Direct, one of the largest day-trading firms in the country. The settlement covers some of the losses of four investors who say All-Tech duped them into believing they could make easy money in the rapid-fire world of day trading. It's in addition to a $475,000 fine the NASD levied against All-Tech in June for allegedly misleading investors about the risks of day trading in advertisements.
That operations like All-Tech Direct keep chugging along screams out for the continuing need for basic investor education. Way back in May 1999, after all, the company agreed to pay the Massachusetts Investor Protection Fund $278,000 after the Massachusetts Securities Division charged it with deceptive advertising and making unauthorized transfers of customer funds.
Then, in July 1999, All-Tech was one of the firms where day trader Mark Barton went on a shooting rampage in Atlanta, killing nine people. You can't blame the firm for a crazed gunman who'd lost it long before he'd ever set foot in one of its offices, but you'd think the sheer spookiness and the media coverage would at least get people to do a little bit of homework before plunking down money with a day-trading company like All-Tech.
If they did their research, this is what they'd find: Using the company's electronic communications network in any of All-Tech's near-dozen offices, investors -- excuse me, let's just say "traders" -- can trade over the counter (OTC) and Nasdaq stocks without using a broker. Whoopee! Strike up the band for the little guy -- no broker needed.... Oh, but wait, for this privilege, you pay All-Tech $24.95 per transaction. Add to that $250 per month in fees (waived if you execute 100 trades per month) and $2,000 to $3,000 for "training." Plus, you must fork over a minimum of $25,000 just to open an account.
Now, one of the complaints lodged against All-Tech in this latest settlement was that the people involved in their program were encouraged to trade too often. Well, duh -- it's a day-trading operation. In fact, the more you trade, the better deal you get: After the first 100 trades per month, fees gradually step down -- reaching $19.95 for trades 300 to 500. (They're discounted further after 500 trades.)
Think about this: If you traded 500 times over the course of a month, you'd end up paying $10,925 to do so. Of course, you might spend more. I mean, is 25 trades a day really enough? Maybe not. Don't forget to add in $2,500 for your training. That comes to $13,425 just to get through the first month. If somehow you were able to keep it going, you'd have dropped $133,600 in trading costs over the course of a year.
It's laugh-out-loud funny. What kind of return would you need just to break even with fees like that? Remember, The Motley Fool recommends investors don't pay more than 2% in trading commissions. To stay within that guideline, you'd have to trade $7 million in assets. Good luck. Remember to come up for air once in a while.
In this latest squabble, the wronged parties claimed All-Tech didn't accurately represent the risks of day trading -- not to mention the risks of paying out all of your money to All-Tech. But the risks can be illustrated without even discussing full-time traders: A few years ago, a University of California-Davis study followed the habits of average investors at a discount brokerage. The end result: trading kills. The average household in the study turned over 80% of its portfolio each year and, in doing so, lost to the market averages.
That's just the impact of trading on regular portfolios. No matter what kind of cockamamie system you devise, how could it be any better trying to time those quick up-ticks and small percentage swings every day, all the while making sure you get all of your money out of the market by the closing bell? It's got to be easier and a heck of a lot more fun to go lose your money in Vegas. At least there you stand a good chance of indulging yourself in some cheap gastrointestinal distress at the buffets.
What do you get for day trading? A pile of tax forms that must be an inch thick come April. Seriously, never mind having to huddle up in a big room of market-watchers every day; the tax nightmare, if you actually made money, would be enough to turn me off from the whole prospect of it.
I'm sure there are individuals who make money day trading, particularly for short periods of time. I have no doubt that the regulars on the Day Trading -- The Devil's Den discussion board will pound me for what they'll think is closed-mindedness. Feel free to flame me there, but also tell me how many pages your tax filing is -- I'm not kidding, I really want to know.
The bottom line: As we've always said here at the Fool, day trading is not a viable way to make money for most investors. It's too expensive, too risky, frequently involves shady outfits like All-Tech, and probably requires too much Maalox to make it worthwhile.
If you've lost money day trading and you're trying to figure out what to do now, bop on over to the Fool's School. It's a great place to start a new investing "life."
Bob Bobala loves losing a quarter at a time at those mechanical horse races some casinos have. It's fun watching the little horsies go 'round and 'round. He has never day traded. In fact, The Motley Fool's trading guidelines prohibit it. |
