Many people have the wrong idea about investing. They think that if their investment advisor trades frequently, and is constantly chasing the “latest opportunity,” they are doing a good job and earning their keep.
In fact, the opposite is true.
The best thing for your portfolio, and often the hardest thing to do when the market is in turmoil, is to do nothing.
Or, as advocated by investment gurus ranging from Burton Malkiel to Warren Buffett’s partner Charlie Munger, “don’t just do something, stand there.”
Trading too quickly, in response to every fear, fad and scary headline, will inevitably lead to buying high and selling low … the opposite of what a savvy investor needs to do.
In a landmark 2000 study called Trading Is Hazardous to Your Wealth, Terrance Odean, a finance professor at the University of California, Berkeley, found that “individual investors … pay a tremendous performance penalty for active trading.”
He studied over 66,000 households with investment accounts and discovered that those that trade the most earned only 2/3 of what they would have earned if they did nothing at all.
“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.”
Cathy Smith, director of the Center for Behavioral Finance for Allianz Global Investors, came to the same conclusion. She noted that female portfolio and hedge fund managers have outperformed men and achieved better investment results over the past five years.
In part, she says, it could be because men trade 45% more than women. Men are often more over-confident, which leads them to hold riskier portfolio positions and overestimate their ability to beat the market.
The Takeaway: Recent headlines have rated high on scare tactics, threatening stock meltdowns, bond disasters and other investment catastrophes. It’s easy to give in to the inclination to take your money and run. But as usual, a more cautious and measured response is in order. Avoid the knee-jerk reaction, and think (and think again), before taking action. And remember, sometimes the best action to take is no action at all.