Trading Is Hazardous to Your Wealth

“Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.



The white bar represents the net annualized geometric mean return for February 1991 through January 1997 for individual investor quintiles based on monthly turnover, the average individual investor, and the S&P 500. The net return on the S&P 500 Index Fund is that earned by the Vanguard 500 Index fund (VFINX). The blue bar represents the monthly turnover.

Additional conclusions:

  • Households trade common stocks frequently. The average household turns over more than 75 percent of its common stock portfolio annually.
  • Trading costs are high. The average round-trip trade in excess of $1,000 costs three percent in commissions and one percent in bid-ask spread.

It is the cost of trading and the frequency of trading, not portfolio selections, that explain the poor investment performance of households during our sample period. In fact, the tilt of households toward small stocks and, to a lesser extent, value stocks helps their performance during our sample period during which small stocks outperform large stocks by 15 basis points per month and value outperforms growth by 20 basis points per month”.



Disclosure: This website contains the public articles, and this communication is for informational purposes only. Nothing herein should be construed as my opinion, solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from publicly available sources believed to be reliable but we do not guarantee accuracy or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional investment, legal, tax, or accounting counsel.




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