theglobeandmail.com
Frequent Trading Reduces Investment Returns: Study Highlights Risks for DIY Investors
A University of British Columbia study shows frequent trading significantly lowers investment returns; DIY investors are especially vulnerable due to easy access to accounts, necessitating strategies like creating a written investment plan and limiting market monitoring to curb impulsive trades.
- How does easy access to investment accounts exacerbate the problem of impulsive trading for DIY investors?
- The study highlights the increased volatility experienced by active traders compared to buy-and-hold investors. This underscores the importance of a well-defined investment strategy to mitigate emotional decision-making and improve long-term returns.
- What are the key findings of the University of British Columbia study regarding the impact of frequent trading on investment returns?
- Frequent trading significantly reduces investment returns, as confirmed by a University of British Columbia study. This effect is amplified for DIY investors due to easy access to accounts, increasing impulsive trades.
- What specific strategies can DIY investors implement to minimize emotional decision-making and maintain a disciplined long-term investment approach?
- To counteract impulsive trading, investors should create a written Investment Policy Statement (IPS), limit market monitoring, and establish barriers to trading. Employing all-in-one ETFs further reduces the temptation to actively manage the portfolio.
Cognitive Concepts
Framing Bias
The narrative strongly emphasizes the negative consequences of frequent trading and the advantages of a passive buy-and-hold approach. Headlines and the overall structure guide readers toward this conclusion, potentially downplaying or overlooking the potential benefits of active management in specific circumstances. The repeated warnings against tinkering reinforce this bias.
Language Bias
The language used is generally neutral, but phrases like "plunging market" and "instill panic" carry negative connotations that subtly influence reader perceptions. More neutral alternatives could be "declining market" and "cause concern.
Bias by Omission
The analysis focuses heavily on the risks of frequent trading and the benefits of a buy-and-hold strategy, neglecting potential downsides of buy-and-hold, such as missing out on significant market gains or underperforming assets that may need adjustment. There is no discussion of alternative investment strategies beyond buy-and-hold or the suitability of buy-and-hold for different risk tolerances or financial goals.
False Dichotomy
The article presents a false dichotomy by framing the investment choices as solely between frequent trading and a strict buy-and-hold approach. It doesn't acknowledge the existence of more nuanced strategies, such as periodic rebalancing or tactical asset allocation, which could fall between these two extremes.
Sustainable Development Goals
The article promotes long-term investment strategies, which can contribute to reduced inequality by enabling broader access to financial markets and potentially higher returns for all investors, rather than just those who actively trade. By reducing impulsive trading and encouraging a buy-and-hold approach, it helps mitigate the risk of disproportionate losses for less experienced or financially vulnerable investors.