🚨 Academic Research: "Trading is hazardous to your wealth.”
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The Less You Trade, The Better You Do.
Academic research shows that individuals investors who trade more, do worse. This study puts it bluntly: “Our central message is that trading is hazardous to your wealth.”1
👉 Remember This: Overconfidence causes disasters. It also causes active trading.
👉 Try This: Next time you think about buying or selling, ask yourself: “Am I falling victim to overconfidence?” That keeps me from disrupting my portfolio.
📚 Reading: The mathematical advantages of doing nothing
Inactivity Means More Compounding
In his book The Warren Buffett Portfolio, Robert Hagstrom illustrates how compounding is interrupted by activity.
👉 Remember This: When you sell a winning stock, you pay capital gains tax. Your money compounds more forcefully when you leave the gain in place.
💬 “The tax code gives you an enormous advantage if you can find some things you can just sit with." —Charlie Munger
💬 “If you’re going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15%—or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening….” —Charlie Munger
Your Portfolio = Bar of Soap
Christine Benz is director of personal finance for Morningstar. She has one of my favorite quotes related to active trading: “Your portfolio is like a bar of soap—the more you handle it, the smaller it gets.”
She also tweets back.
👉 Did You Know: I am on Twitter, too. Say hello @ChrisFranco.
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Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Journal of Finance, Vol. 55, Issue 2, April 2000, Available at SSRN: https://ssrn.com/abstract=219830