Some investors have forgotten, and some investors just don’t know, but if you are a retail investor, over-trading is generally very bad for your wealth. This article provides a few reminders, perhaps eye openers, starting with this “oldie but goodie” chart about just how bad the average investor really is.
The above chart was included within a Market Watch article back in 2014 with the following caption:
“When chaos strikes, the average investor heads for the hills and ends up paying the price in long-term underperformance.”
But the evidence doesn’t stop with just that article. Consider a few more examples:
- Why Average Investors Earn Below Average Market Returns (spoiler alert: they recommend avoiding “overreacting” as well as “doing nothing” so long as your long-term goals haven’t changed.)
- Quantopian: Even all the brainic mechanical engineers and nuclear scientists at Steve Cohen and Marc Anderseen’s Quantopian can’t seem to get it right (Quantopian investors have lost about 3% since the beginning of trading in June).
"Quantopian is a young firm and could yet turn its fortunes around. But the challenges so far suggest that recruiting and training mechanical engineers, nuclear scientists and other amateurs around the globe to be quantitative traders may be more difficult that some had expected. Read more at WSJ."
- Eugene Fama: Even one of our favorite academics, the Nobel-prize winning Eugene Fama from the University of Chicago is reported to have said:
“Your money is like soap. The more you handle it, the less you’ll have.”
- At Blue Harbinger, whether we’re managing accounts for clients, or sharing our beliefs with “do-it-yourselfers,” the same principals apply. In fact, we rank “over-trading” within the “overpaying for your investments” category, which is the number one deadly sin for long-term investors in this article: 7 Deadly Sins of Long-Term Investing.
Overall, trading too much is one of the reasons the average investor has such a terrible track record. Specifically, it can rack up fees, detract from performance, and prevent you from achieving your goals. Be Smart.