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How online trading can grow long term wealth

By Captain FI

What is online trading?

Online trading is simply the process of buying (or selling) shares using an online share trading platform (or broker). There are many online share trading platforms available, but the key to building long term wealth is selecting a trading platform which is safe, that encourages you to regularly invest for the long term, and has transparent low fees.

 

How is online trading different to online investing? 

Both phrases are commonly used to describe investing in shares. Online trading is more commonly used and widespread than online investing, though online investing is far more accurate for most retail investors who aim to buy, hold and accumulate shares over the long-term (as opposed to buying and selling frequently). 

Brokers like Pearler that care deeply about financial wellness and creating better financial outcomes through long-term investing have gone as far as banning "trading" from their vocabulary!

How to invest and/or trade online

Gone are the days when you needed to visit a bank branch, write or phone your broker to make trades. One of the most remarkable advances in modern technology has been the internet, and the way it has revolutionised communication and information flows has made trading easier, cheaper and more accessible than ever for retail investors to make trades.

Investing via online trading is quick, simple and easy. Especially with the advent of Exchange Traded Funds (ETFs), an investor can within a matter of hours, be signed up to an online trading platform and with one trade have total diversification with global exposures for their portfolio

However with the plethora of options available, it can be somewhat confusing for someone just getting started investing to understand what to look for when selecting an online trading platform.

 

What to look for when selecting an online trading platform

There are a number of things you should look for when selecting an online trading platform, including;

  • What does the trading platform let me buy (i.e. which markets, Australia vs USA vs Global)
  • Is the trading platform safe to use (are my funds and investments secure)
  • What is the price of making the trades (the brokerage cost)
  • How transparent is the fee structure and terms and conditions
  • Is the trading platform easy to use
  • How does the trading platform make money (i.e. are they encouraging me to trade so they can profit)
  • What do the online user reviews say

Using online trading to diversify your portfolio

Online trading is fantastic for diversifying your portfolio as you can invest in nearly any asset class you can think of using listed products such as Exchange Traded Funds. You can buy listed securities directly (such as individual shares), but there are an increasing number of ETFs and LICs on the Australian Securities Exchange which allow you to invest in;

  • Australian Shares
  • American Shares
  • Emerging Markets shares
  • Global Shares
  • Specific Share sectors such as Tech, Mining, Building or Healthcare
  • Australian Property
  • Global Property
  • Precious Metals such as Gold (through either physical holdings or Gold Miner ETFs)
  • Bonds funds (including Junk, Corporate and Government bonds)
  • Cash ETFs (i.e. money market ETFs which aim to find the highest bank interest possible)

 

And there are even some weird and wonderful, quirky ETFs coming up these days which allow investors to get access to things like wine, collectibles, artwork and even crypto currencies!

Once you have determined which assets you want in your portfolio, and in what proportion, it is a very straightforward procedure to log into your online share trading platform and buy these funds. All you need to know is the ticket symbol - For example the Betashares Diversified All growth ETF has the ticker code “DHHF” (ASX:DHHF)

 

Why frequent online trading is not a good idea

Frequent online trading is not a good idea if you want to build long term wealth. This is because statistically speaking, the majority of investors who do so underperform the market – that is to say, their returns are lower than a basic market cap weighted index fund.

Each year, around 80% of actively managed funds underperform their index which is a pretty alarming Figure. As JL Collins – the OG (Original Grandad!) of investing puts it

“Just buying the index guarantees you will be in the top performance tier, year after year. Not bad for accepting ‘Average’ “ – JL Collins

Professor Barras from the McGill University in Montreal, Canada explained that in the 90’s, up to 15% of active fund managers were able to beat their index, but that this figure is reducing.

Vanguard looked a little further and found that over a 15 year timeframe that 45% of actively managed funds failed to even SURVIVE let alone outperform, and that in total only 18% of actively managed funds managed to outperform their index.

More recently, as reported on CNBC research from the S&P Dow Jones Indices on active versus passive investment management showed that 85% of large cap funds underperformed the index over 10 years, and over 15 years this increased to 92% of funds.

Over a 30 year timeframe, Marketwatch found that only 0.6% of fund managers were able to consistently ‘beat the market’ – prompting their three researches to conclude that this was ‘statistically indistinguishable from zero’. “Only about 1% of active traders outperformed the market. The more frequently people trade, the worse they do” - Brad Barber and Terrance Odean of the University of California.

Frequent online trading is dumb, and will be sure only to make your broker richer. To build long term wealth the facts don’t lie, and they say to regularly invest into low cost index funds.

 

Why I use Pearler for online investing

Whilst I have tried many other online trading platforms to implement my investing strategy, the thing that kept coming back to haunt me was human error and decision fatigue - which is ironic because as a pilot, we heavily rely on autopilot to reduce pilot workload and improve safety (especially on long haul flights where we barely even touch the controls).

I would work myself up into a tizzy figuring out which was the best ETF or LIC to invest in, what the exchange rates were doing, what my portfolio breakdown was and the recent price movements of each fund. It was exhausting. Often I would be swayed by market movements and would miss my regular investment timing, forfeiting the opportunity to buy on discount only to then buy in after markets recovered – despite my best intentions of not doing so/

So, the penny finally dropped. I needed to set a framework for what I wanted to invest in and how, and then engage the autopilot

Enter: Pearler Autoinvest feature

I use Pearler online trading for my core investment strategy because of its auto invest feature. I simply select;

  • The shares I want in my portfolio
  • Portfolio balancing rules (I choose rebalance by purchase by least weighting and am targeting an equal split between three ETFs), and;
  • The amount to invest each fortnight.

Whilst I don’t proclaim to be an expert, this is working for me and has helped me to reach Financial Independence. You can check out my full journey to Financial Independence (and how the auto invest helped) by reading the CaptainFI Net Worth updates.

Other reasons I opted for Pearler is because it is securely CHESS sponsored, has some of the lowest brokerage costs in Australia, does not encourage frequent trading, and I agree with their company values and ethos of long term buy and hold investing to reach Financial Independence – so it was a pretty easy choice for me to switch over.

Full disclosure – I do still use other online trading platforms as part of my ‘satellite’ investing approach so I can test them all out. Whilst I like Pearler, I am not giving them a ‘free pass for life’ and will still be regularly and rigorously testing out their competitors to make sure I am getting the best online trading platform possible and to provide the best comparisons.

That said, currently Pearler is head and shoulders above the rest, so if you'd like to sign up, use my link (or code: CAPTAINFI) to get free brokerage on your first investment.

Summary 

Online trading is simply the process of buying (or selling) shares using an online share trading platform (or broker). There are many online share trading platforms available, but the key to building long term wealth is selecting a trading platform which is safe, that encourages you to regularly invest for the long term in low cost index funds, and that has transparent low fees.

Pearler is the currently the best platform for long-term investors and I am currently using it for my core investing approach of diversified, low cost ETFs, using the Autoinvest online trading feature.

Frequently asked questions about online trading

Which online stock trading site is best for beginners?

Pearler is an online stock trading platform which is easy for beginners to learn with.

How does online trading work?

Online trading works by submitting your trade requests through your online stock broker

Is online trading profitable?

Yes, online trading is profitable to investors who buy and hold the index long term

Is online trading safe?

When conducted through a reputable online broker and using basic online safety such as using antivirus software and VPNs, online trading is as safe as (or safer) than phone or face to face transactions

How do beginners trade online?

Beginners can use Pearler to learn about online trading, and use their guides to make their first online trade.

 

About Captain FI | captainfi.com

I’m Captain FI, and I’m flying my way to Financial Independence!

I grew up below the poverty line in a large, single parent family and left home age 17 on an engineering scholarship. After graduating and working multiple jobs to afford flight school, I eventually earned my wings and went on to a rewarding career as a pilot. I became Financially Independent at 29 through investments in Index funds, property, superannuation and starting my own businesses. I now work part time and focus on my hobbies of flying, writing, podcasting and gardening and hope to one day start my own family. Follow my journey at CaptainFI.com.

At Pearler, we pride ourselves on the quality of the general financial advice we give. Please note though, that this advice has not been tailored for you. You have unique financial goals, circumstances and needs which may make this advice inappropriate, and it is important that you know whether it applies to you. If you are unsure we urge you to speak to someone you trust who is competent with money and understands your individual needs, whether they be a trusted friend or accredited professional

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