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Avoid the Investing Self-Destruct Button

It's a simple fact -- overtrading kills results


“The investor’s chief problem — and even his worst enemy — is likely to be himself,” quipped the great Benjamin Graham.

The truth of Graham’s observation is seen in the consistent pattern of mutual fund investors to self-destruct.

AUDIO: Portfolio Report Card:  Ron Grades a $480,000 account

Over the past 30 years, the typical stock mutual fund investor’s performance has badly lagged the S&P 500 index, according to Dalbar’s Quantitative Analysis of Investor Behavior (QAIB) report. While the average mutual fund investor earned 3.69%, the S&P 500 earned 11.11%.  What were the chief causes behind the significant undeperformance?

The underlying problem wasn’t the 1987 stock market crash, the 2000-2002 dot-com bursting,  the 2008-09 financial crisis, nor poor economic conditions — but rather investor misbehavior.  People chase historical performance, buy the wrong things at the wrong time, and have a knack for poor financial decision-making.

Curiously, one of the main advantages of mutual fund investing is supposed to be professional money management by seasoned pros. But people have found a plethora of ways to mess up even that.

Unfortunately, people who buy individual stocks aren’t that much better than people who buy mutual funds.

In a study conducted at the height of the dot-com frenzy by professors Brad M. Barber and Terrance Odean, they found:

  1. Households trade common stocks frequently. The average household turns over more than 75 percent of its common stock portfolio annually.
  2. Trading costs are high. The average round-trip trade in excess of $1,000 costs 3% in commissions and 1% in bid-ask spread.
  3. Households tilt their investments toward small, high-beta stocks. There is a less obvious tilt toward value stocks.

I recently caught up with Terrance Odean, who continues his groundbreaking research about investors’ habits at the University of California at Berkeley. In my video interview with Odean, he talks about a 14-year study of Asian daytraders and how it relates to individual investors in the U.S. and elsewhere.

It’s required viewing for anyone with designs on beating the market … or really, even just keeping up.


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Article printed from InvestorPlace Media,

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