A frictionless surface has a coefficient of 0. There is literally nothing in the way.


What does a frictionless investor experience look like?

We have data going back to 1926, and if you had invested your money in a diversified basket of large company stocks in the U.S. -- so a little bit into each one -- the historical annual return would be 10.3%.*

For investors in stocks, we want our 10.3%. We want it consistently, and we want to get it with as little risk as possible. Here is what happens with just $1, over 95 years, at 10.3%...


Once you see that $10,937 number, it's obvious why it's all worth it. That's all from $1, though admittedly you're at a rather ripe age when you're earning 10.3% on a value like $9,000 -- when the outcome is meaningful (almost a thousand bucks), whereas 10.3% when you're just starting off at $1 is just a nose hair more than a dime.

The 10.3% is a return with reduced frictions -- it's without fees, without human emotions and without behavioral biases, and it's with the assumption that a vehicle to even invest this way existed (it didn't for most of this this time, but it does now).

No investor experience will ever be frictionless. Full stop.


But you can try to reduce various things that get in the way of your 10.3%.





You may be at a very beginning point of your journey, and hardly know where to start. Your coefficient of friction is likely high. You may have big frictions like not really knowing how stocks work, or how to design, implement, and maintain an risk-appropriate portfolio.


And you may also have smaller frictions that take less effort to erode, like the need to set up the appropriate accounts at a custodian, or the fact that you lose your password frequently and it's frustrating to reset it. You may think making "money" sounds good and select "money market" in your 401K. I've seen that happen.

Seasoned investors don't necessarily have fewer frictions -- they just have different frictions. They may have firmly held beliefs about what stock prices should be, that stock prices themselves may never agree with. Maybe they are overconfident, or possibly anchored to past opinions amidst an orgy of their own cognitive and behavioral biases.


All investment outcomes involve elements of luck, so it can be just as frustrating for professionals as amateurs.**

Once you start looking around, investor frictions are everywhere. There's tax friction, and even FOMO friction. If you decide to outsource your money to an advisor, now you have an explicit advisor fee friction, plus you inherit implicit frictions that you didn't previously have to deal with (like operational frictions, or the advisor implementing a silly investment strategy).

Like investor experiences, portfolios themselves don't have zero as their coefficient of friction. Fees again. Taxes again. People thinking they're smarter than the market...again.


Some have more frictions than others, but none are frictionless.

History tells us that by undertaking the associated risks, the economic benefits of owning stocks are worth about 10.3%/year. If you have a long-term time horizon, then embrace the inevitable, accompanying frictions. And reduce them where possible.


End.


---

*Investors should diversify across more than just large U.S. stocks, and also include global stocks -- large and small. It's reasonable to consider the expected return over long periods to actually be a little higher than 10.3% annualized when doing this, but we don't have data going that far back globally.

**If you're interested in luck vs. skill in investing, consider this post about The Queen's Gambit back from 2020, and consider reading Annie Duke's fabulous decision-making book, Thinking in Bets.


15/15