Outside of buying my first house and the Detroit Red Wings winning their fourth Stanley Cup in 11 years, 2008 doesn’t hold a lot of lasting pleasant memories for me. I am sure I am not alone, especially when you look at the year that was from a financial point of view (along with the woeful Detroit Lions going winless). I recently read that over $10 trillion of household wealth has been lost since the third quarter of 2007, in the form of life insurance and pension plan reserves, equities, mutual funds, and real estate. While the money lost by individual investors during the recent market downturn is mindboggling, equally troubling is how many people lost faith in the system as well. Unfortunately, it is easy to see why—with home foreclosures at a record number while corporations line up at the Fed loan window for a handout. Sprinkle in the likes of Bernard Madoff and his $50 billion Ponzi scheme, and capitalism and the idea of free markets take a considerable hit in the credibility department.
While it will take years to see the true impact 2008 will have on the financial well-being of millions, I am confident that the system, while shaken, is not broken. I make my monthly contributions to my retirement account not blindly, but with the reassuring knowledge that history is on my side. Despite short-term shocks to the system, the stock market, over the long term, is the best investment vehicle we have at our disposal. Even now, with the market still gripped by uncertainty, there are companies with strong long-term prospects that are unbelievably cheap. The worst thing an investor with a five-plus-year time horizon can do right now is to cash out and move their money to the sidelines. Patience and conviction are powerful tools for any investor in this environment.
Our annual comparison of on-line discount brokers, starting on page 9, lists 43 brokers this year. This number has stayed relatively stable over the last four years, slipping slightly from 47 in 2005. Consolidation in order to achieve economies of scale is now the focus among discount brokers. In fact, as we go to press, TD Ameritrade is announcing its acquisition of thinkorswim.
The comparison covers a range of brokers. Your investing style, typical holding period, and investment knowledge help to determine which broker is best for you. If you trade frequently, then you will probably want to focus your search on the deep discount brokers, or a broker that has a monthly fee but very low commissions.
Of course, trading costs go beyond brokerage commissions. Quality of trade execution is just as important—factors such as the actual trade price, whether the broker was able to shop around within the quoted bid/ask spread (known as price improvement), the order fulfillment speed, and even the likelihood that an order will be filled when it is entered. All of these factors are intertwined and involve some level of compromise—for example, attempting order improvement may result in a slight delay of execution.
The On-Line Discount Broker Comparison should offer a number of brokers that match up with your needs.