(Image: Luis Fabres)

What do you want from an online stockbroker?

• A secure institution you can trust
• Low dealing charges
• Low or no annual fees
• A decent rate of interest on free cash (good luck with that!)
• Special offers, such as free trading for a few months
• Dealing inside the spread (the buying and selling price of a share) to save a few tenths of a per cent with each trade

Sure, let’s take them all. All the big players offer competitive deals, so be as picky as you like.

After five years of dealing online, however, I’ve learned the hard way that something else matters. Something you may think sounds silly, but which will make you money long-term.

The number one thing to look for when choosing a broker

You’re going to laugh. You’ll think I’m mad. But I think you want to look for a broker with a dealing screen that’s…

b o r i n g.

Really! You see, plenty of online dealing accounts and trading platforms big up the More Graphs! More Colours! More Data! Built-in Minesweeper and Pac-man! of their trading platform. You’d think the user was going into space, not buying a few shares towards their nest egg.

But there’s a very serious reason why ignoring such fripperies and instead choosing a broker with deathly boring screens will make you money. Simply, private investors who trade less do better. So you want a trading platform that slows you down, not one that psychs you up.

Studies prove frequent traders do worse

Terrance Odean, a professor at the University of California, Berkeley, conducted one study of several that found frequent traders do worse than average:

Using account data for over 60,000 households from a large discount brokerage firm between 1991 and 1996, the study found the average household earned an annualized return of 17.7 per cent. The 20 per cent of households that trade most (which averaged at least 9.6 per cent turnover per month) earned a net return of 10.0 per cent.

The poor performance of those households that trade frequently is generally consistent with the implications of recent theoretical models of investor overconfidence. Our message is trading is hazardous to your wealth.

Look at that difference again – it’s incredible! The trigger-happy investors who considered themselves the smartest kids on the block returned 10% a year. Those who did less trading earned 17% a year – nearly twice as much – by leaving well alone.

Now I knew over-trading was a problem, as it costs more in fees, but even I was staggered when I read that performance difference.

There can be good reasons for trading shares. A business you loved might now stink, or the share price may have soared and you want to protect some of your profits. Perhaps you need the money for a new sports car.

Trading for no good reason though is much worse than not trading at all. And, getting back to the point, too many trading platforms and online brokers encourage you to execute more trades. Let’s not forget how online brokers make their money…

Some platforms will make you trading trigger happy

Below I’ve grabbed a few example screens from some of the trading platforms out there. Please note, in most cases I do not use these platforms, and I have not at all evaluated their overall offering. I’m in no way saying they don’t offer a great service – I don’t have an opinion about that.

What I am saying is that with all the colours, graphs and flashing on offer, you’ll trade more than if you kept share certificates in the sock drawer, or if you used a boring online broker.

Here’s a screen from online spread better IG Index:

IG Index: Flashy platform

IG Index, the online spread betting firm, has a trading screen that constantly flashes red and blue depending on whether things are rising or falling. The screen above is for popular trades, but your portfolio blinks and whirs like a fruit machine, too. And this platform has won awards.

Now, I accept that spread betting is usually for more short-term punts than full-time investing, and I’m actually a great fan of IG Index. But when I’m running investments as spread bets on there, I try to use different websites’ tools to monitor my underlying securities and avoid logging on to IG Index.

If I keep the IG Index screen open, my heart beats faster, my mouse hovers over the various trading buttons, and I get giddy with the urge to Do Something. It’s a reflex response to all the activity on-screen.

Two trader packages: Trade Trakker and Trader Workstation

See red with Trade Trakker

OptionTrader: To buy or sell or buy or sell or... etc etc

These screens are from advanced packages aimed at serious desktop trader-warriors. The top screen is from a ‘a powerful portfolio management software program’, the bottom is an options trading subsection of a broader package.

I haven’t used either. I’m only citing them here as an example of the sort of thing the average armchair investor wants to avoid with barge poles. If your online brokerage account has a passing resemblance to packages like these (and most are going this direction), then you’ll probably be in the over-trading bracket before long.

Do you want to trade like the professionals? No!

You might think it’s advantageous to see if a share is going up or going down right NOW. That’s what professional traders in the city demand, don’t they?

True, but that doesn’t mean you should stick your hand in the fire as well.

Here’s a London trader’s terminal screen from a few years ago:

Colour bind: a trader's terminal screen

In this display, when share prices rise they flash blue. When they fall they flash red. As a result, the screen constantly flashes. Note the prices shown aren’t the stock prices, just the movements in this trading session!

Good for the professionals, so good for you? I don’t think so. Remember, stockbrokers make money by buying and selling shares, often by taking a percentage of each trade. Over-trading actually makes them richer.

Sure, it makes sense for a professional trader who wants to skim off a penny here and there to be bombarded with the very latest share movements. A screen flashing red and blue like a patriotic Can Can girl’s knickers is a bonus for a 20-something broker headed towards his first stroke, but for home investors it’s excitement you can do without.

Long-term investors like us should fight the urge to buy and sell on a whim. Our only chance is to go our own way, not follow the market’s flow.

If you’re going to do what the market dictates, buy index tracker funds for guaranteed near-market returns, and save yourself a bundle in charges. If you’re determined to do your own thing, however, you don’t want to be scared into following the herd.

A Reuters terminal screen:

Reuters: which road to follow?

Reuters is one of the leading providers of financial information for analysts, stock brokers, financial journalists and other Cityboys. You can see the clear influence of its terminals on the bells-and-whistles trading tools and online accounts offered to home investors.

But again, remember Reuters is targeting people who make their daily living from market movements.

If I was a broker or a market commentator, I’d want to know exactly what was happening in the markets from second to second. As a private investor though, such information is only likely to lead to over-trading, and that will probably damage my performance, as found in the Berkeley study above.

Saying I need pro-level tools to run my personal portfolio is like demanding a forklift truck to move furniture about my house. Sure, a professional warehouse worker will want to use a forklift truck at work, but if he drives one around at home he’s only going to make an expensive mess. Ditto trading platforms.

How to spot a boring trading platform

I currently use several online brokers and spread betting accounts, each with their own advantages and disadvantages. Not all are the oasis of contemplation that I’d like, as I didn’t give two minutes thought to this before I opened these accounts a few years ago. If I’m honest, back then I believed flashing prices and real-time graphs and so on were a good thing, too.

My favourites accounts now, from a user-interface perspective, are those that:

• Do not use colour to show whether a price has risen or fallen today (one day is just ‘noise’ for a private investor)
• Do not use colour to show whether my holdings are in profit or not (technically, the price I paid for a share is irrelevant, and swathes of red will make anyone reach for the ‘Sell’ button)
• Do not feature graphs or stats on the home page (irrelevant and distracting)
• Do not tell me what other investors are buying and selling today
• Show me the total value of my holdings, not their daily price moves (unless I look for them)
• Are in one dull colour, preferably black or blue
• Enable me to see a top-level view of my portfolio, without showing  the specifics (unless I click in for them)

I’m not saying you shouldn’t be informed about your investments in the medium term. Just that it’s better to informed at your own pace.

You should set aside time once a week or month or even once a year to calmly consider how your holdings are doing, what you need to buy, sell, trim or add to. At such times, the huge range of investment tools out there are a boon, compared to the old days when we had to send away for company annual reports or rely on newspaper tips. Graphs, analysis, colours – all are useful enough when you’re making a sober decision about your shares.

But make those decisions at your own pace, without distractions. Don’t log in to do a routine check-up and find yourself trading. Avoid the hyperactive multi-coloured siren calls of online broking accounts and trading tools, and you’ll avoid being rushed into hasty decisions and over-trading. And that will make you richer in the long-term.