The good news: Trading fees have come way down. The standard $30 per trade has been replaced by $4.99, thanks to growing competition among online brokers.
The bad news: They're attempting to recoup the difference through volume – hoping to persuade investors to hit the buy and sell buttons with lightning speed. In most cases, investors need to make at least 50 trades, totalling nearly $250 a month, to qualify for the deep discount.
"That's what those teaser rates are designed to attract: high turnover," says Peter Kenny, chief market strategist with ClearPool Holdings, based in New York. The Wall Street veteran says high-volume trading is for day traders who have strong financial backgrounds, the time to stay on top of second-to-second market developments and the ability to act with precise timing.
For the average retail investor saving for retirement, high-volume trading could be a recipe for disaster, he says. His advice is simply to buy companies with strong balance sheets and growth potential – and be patient. "At the end of the day, longer-term investment strategies tend to require significantly less time to manage."
So, how many trades does Mr. Kenny think is right for the average retail investor? "A traditional self-directed investor is making, at the most, 40 trades a year," he says.
Investors who believe more trades lead to more profits could be in for a costly shock, says Zachary Curry, chief operating officer and portfolio manager at Toronto-based Davis Rea Ltd. "I don't think you're ever going to succeed that way," he says. "Generally, retail investors buy at the top and sell at the bottom."
He says the high-volume-trade mentality is rooted in the dot-com bubble of the late 1990s when markets drove stocks to unreasonable heights based on little or no fundamental change in the company.
Since equity markets have been steadily going up for more than five years, he says many investors have lost touch with a basic market reality – what goes up must come down. To him, high-volume trading could multiply those downs when, in reality, the best course of action is no action. "It's incentivising you to turn over your portfolio whether it's a good idea or not."
Mr. Curry says he encourages his clients to take a long-term view. "A three- to five-year hold would be our optimal time period. If we can't see how that's going to work in that time period, we don't buy it."
He says his clients typically make about 10 trades a year in their portfolios. And the bulk of those trades are strategic – shuffling existing stocks and using a long time horizon to reduce risk without compromising returns.
One effective strategy he is using in this bull market is selling stocks that have made gains above their peers or the broader index. He may even trim an existing holding that is still trading at fair value if it has risen to a point where its value is disproportionate to other holdings in the portfolio.
"Even if it's the best holding in the world, I don't think you want 25 per cent of your portfolio in that stock," he says.
Having cash on hand from the sale of those stocks comes in handy if markets dip and good stocks can be purchased at a bargain – even if they're the same stocks that were trimmed at a higher price. "We call that trading around a core position. You might not sell the whole thing, but you can sell parts of it as the valuation goes up. If you get lucky and it comes down again there's no reason you can't buy it back."
He says all portfolios should have basic core positions, such as large-cap stocks that are accumulated early in the investor's life. They might be reduced and re-accumulated over the years but could possibly remain in the portfolio into retirement. "There are certain characteristics in stocks – balance sheet, management team, income features – that you could look at and say, 'This is more of a core holding.' "
Typical core holdings are big dividend payers such as utilities, telecom providers and pipeline companies. "Stocks that have income features tend to weather the ups and down a lot more," he says.
Two pipeline examples are TransCanada Corp., which pays an annual dividend yield of 3.3 per cent, and Enbridge, which pays out 2.6 per cent, he says.
Enbridge shares have risen nearly 30 per cent over the past year, outpacing the company's peers and prompting Davis Rea to do some selling. "We've trimmed it once and we've trimmed it again because we feel the valuation is steep, but we haven't sold it entirely."
Not all core holding are carved in stone, though. Telecom giant BCE Inc. is a staple in many Canadian portfolios with a generous dividend yield of more than 5 per cent. Mr. Curry says changes in government regulations relating to wireless and television services have him questioning BCE's traditional revenue streams. "When else have you had competition as crazy as it is now?" he asks.
The rate of equity turnover often increases as market cycles shift, but as central banks pull back the reins on low interest rates and cheap money, Mr. Curry doesn't expect any drastic changes in strategy for the foreseeable future.
"We have a fair bit of cash on the books. The market has been going up for over five years. You might get to lucky Number Six, but historically that's beyond an average market cycle. It's time to be at least a little prudent."